All About Payroll Compliance

Why Is Payroll Compliance Important for Businesses?

Payroll compliance is when your business adheres to all the payroll legislation and legal regulations for the processing of payroll.

The compliance laws include federal, state, and local levels that dictate how employees are paid or how taxes for their pay is collected and submitted.

The most important aspects of compliance payroll ensure:

  • Secure, accurate, and timely payment for employees and the work they produce
  • Penalties and fines for improper tax filing are avoided 
  • That financial audits are passed
  • Protection from potential lawsuits or claims of wage discrimination, underpayment, or nonpayment
  • Social Security, Medicare, and unemployment benefits are adequately funded

What Is the Impact of Non-Compliance on Employers?

Not fulfilling payroll legal requirements and compliance can result from honest errors, negligence, fraud, or ignorance of the existing laws.

If you are found guilty of non-compliance, the consequences can potentially be quite severe:

  • You may have to pay back any wages that they underpaid or failed to pay your employees, plus additional interest and fines
  • Internal Revenue Service (IRS) or other tax authorities may decide to conduct an audit, which can result in fines, penalties, or even criminal charges if any violations are uncovered
  • You may have to incur legal costs to defend yourself against lawsuits or claims from employees who allege payroll non-compliance
  • You will lose the trust and loyalty of your employees, and your reputation as a good employer will be finished

What Are the Most Common Payroll Mistakes Businesses Make?

Misclassifying Employees as Independent Contractors

Misclassifying employees as independent contractors happens when businesses try to save money. Doing so essentially classifies individuals as self-employed rather than as employees and therefore removes the requirement to provide paid time off (PTO) or any other benefits. 

This dishonest practice is grossly unfair to the employee and actively violates the Fair Labor Standards Act (FLSA) and other laws that provide protections and benefits to employees.

To avoid this mistake, you must follow the payroll guidelines outlined by the IRS. These clearly outline what classifies a worker as an employee or an independent contractor by using three main criteria:

  • Behavioral control
  • Financial control
  • Relationship of the parties 

There may be laws surrounding worker classification that are unique to your state or local municipality. Therefore, look at all three areas to ensure you’re in compliance.

Failing To Withhold Taxes from Employee Paychecks

As an employer, it is your responsibility to withhold the correct amount of taxes from all employee paychecks. 

However, errors can occur if you do not use the right tax tables or fail to update your payroll software to reflect any changes. Additionally, if you fail to account for any tax changes or neglect to follow the employee’s Form W-4 instructions, this can also result in incorrect tax withholdings.  

What’s going to happen here is either the underpayment or overpayment of taxes, which can then lead to penalties if underpaid or a refund if overpaid.

To stay in line with these tax payroll regulations, make sure you use reliable and up-to-date payroll software. It’s also a good idea to view and verify each of your employee’s Form W-4 information and make any necessary adjustments.

Not Making Timely Payments to Employees

Late payment of wages can happen if you do not have a clear and consistent payroll schedule or if there aren’t enough funds in your bank account. Failing to have a secure and efficient payment method set up is another common reason. 

Failing to pay your employees will result in incurring late fees, bounced checks, employee complaints, and even legal action.

This problem can be easily avoided by establishing a regular and predictable payroll schedule that complies with the FLSA and any state or local laws. Make sure you process payroll ahead of time so you can better manage your cash flow and use an electronic payment method, as this is faster and far more secure than paying by check. 

Neglecting To Track Overtime/Exempt Status for Employees

Neglecting to track overtime or exempt status for employees results in underpayment. This commonly occurs when businesses fail to keep accurate records of employee hours worked, 

It also happens when employees are not properly classified as exempt or nonexempt based on their job duties and salary level. 

All of this violates FLSA and other laws that require overtime pay for nonexempt employees and minimum salary for exempt employees.

Reliable and compliant time-tracking software should be used to avoid this error. You must also acquaint yourself with FLSA and other laws that define the criteria for exempt and nonexempt status and ensure that your employees are classified correctly.

Paying the Incorrect Amount When Issuing Bonuses

Incorrect bonus payment happens when businesses do not account for taxes, deductions, or other factors that may affect the net amount of the bonus. 

Again, using proper accounting software that can automatically calculate the correct amounts for you is a surefire way to prevent this from happening.

Not Reporting New Hires to the Government in a Timely Manner

Federal and state laws require you to report new hires within a certain time frame, usually 20 days or less.

Failure to report is usually the result of a failure to collect and verify the necessary information from new employees, such as their name, address, Social Security number, and Form W-4.

To prevent this, establish a clear collection and verification procedure for new hires and be extremely strict on the deadlines. 

What Laws and Regulations Relate to Payroll Compliance in the US?

Some of the laws and regulations that relate to payroll compliance in the US are:

  • Fair Labor Standards Act (FLSA): This sets the national minimum wage, overtime pay, recordkeeping, and child labor standards for most employees in the private sector and in federal, state, and local governments
  • Federal Insurance Contributions Act (FICA): This imposes a payroll tax on both employers and employees to fund Social Security and Medicare programs. The FICA tax rate is 15.3%, split equally between employers and employees
  • Federal Unemployment Tax Act (FUTA): This is a payroll tax for employers to fund unemployment benefits for workers who lose their jobs through no fault of their own. The FUTA tax rate is 6% of the first $7,000 
  • Equal Pay Act (EPA): This law prohibits wage discrimination based on sex. The EPA requires employers to pay equal wages to men and women who perform substantially equal work
  • Davis-Bacon Act: A federal law requiring contractors and subcontractors working on federally funded or assisted construction projects to pay their staff wages and fringe benefits as determined by the Department of Labor

State and local laws and regulations: These could affect your payroll compliance quite drastically, so you must ensure you’re up to date with these. The legislation varies from state to state and by locality

How To Ensure Your Business Is Compliant With Fed/State Regulations

Here is a handy payroll compliance checklist that you should use for your business:

  • Keep up-to-date with the latest payroll laws and regulations at all levels 
  • Use reliable and updated payroll software 
  • Train and educate your employees and managers on payroll policies and procedures
  • Review and audit your payroll records regularly
  • Keep electronic copies of all payroll documentation
  • Seek professional advice from tax experts or lawyers if you are unsure about any aspect of payroll compliance

What Is the Financial Risk for Noncompliance?

The financial risk of non-compliance can be hugely devastating for your business. 

The severity of the penalty for non-compliance depends on what you did and can incur one or more of the following:

  • Fines, penalties, or interest from the IRS or other tax authorities
  • Audits, investigations, or lawsuits from the Department of Labor or other government agencies
  • Claims, complaints, or litigation from employees, unions, contractors
  • Loss of trust, loyalty, or morale from your employees, customers, partners, or investors
  • Loss of business reputation and the inability to attract decent talent

What Are Strategies for Staying Compliant With Payroll Laws?

To stay on top of current payroll laws and regulations, you need to make sure you do the following:

  • Regularly read and monitor news and updates from the Internal Revenue Service (IRS) and the Department of Labor (DOL)
  • Train your payroll staff on the best practices and procedures for payroll processing and reporting
  • Use modern payroll software and ensure you keep it updated to reflect any changes
  • Conduct regular internal audits. This will help you spot any errors or anomalies
  • Create a compliance calendar that tells you what you need to do and when. This is especially important for taxes
  • Foster a culture of compliance among your employees. You can do this by recognizing and rewarding those who follow procedures, providing regular training and upskilling, and encouraging feedback

Consult a financial expert in payroll compliance services. Sometimes you need an outside eye to spot errors that internal staff can easily overlook

How To Create a Compliant Payroll System and What To Look Out For

The first step in creating a compliant payroll system is to consider and pick the right software for your needs. best payroll software that aligns with your payroll needs. There are lots to choose from, including Quickbooks, Gusto, ADP, OnPay, Workful, and more.

These providers often have different pricing tiers and are geared toward certain-sized businesses or niches. Therefore, do your research and find the best provider that suits your business, its size, and your budget.

Next, you’re going to need to gather all the necessary information from your employees, including:

  • Name and current address
  • Social security number
  • Form W-4
  • Employment classification
  • Pay rate, frequency, and method
  • Hours worked for nonexempt employees
  • Exception time 
  • Any adjustments, such as new hires or salary increases

At this point, you must ensure that all the information is up-to-date and correct. Double-check everything and adjust if required. Now, calculate the total gross pay each employee earned during the pay period and withhold taxes and deductions, resulting in net pay.

Once you have all this information, it’s time to add it to your chosen payroll software and create a payroll entry system that will help you record and track your payroll transactions and data. Most software has tools included to help you do this easily.

Finally, train your staff on the new system and make sure everyone knows the new process and understands how it works.

What Is the Importance of Regularly Reviewing and Updating Payroll Systems

It is extremely important to keep on top of your payroll system and how it’s working for you. If your business suddenly expands and you take on many new employees, you may find that you outgrow your current system and have to adjust it accordingly.

Additionally, the laws and regulations change often. Something that may have been compliant yesterday may not be today. Therefore, to avoid any issues and risks, implement a process to ensure your payroll system is regularly updated to reflect any changes in the law.

How Can Technology Help Streamline Payroll Compliance?

One key element of modern payroll technology is automation. With the power of AI, many tasks that were previously carried out manually can now be done on autopilot. For example, sending wages to employees on time and emailing pay slips.

The beauty of this technology is that fewer errors occur, and you are more likely to remain compliant in the process.

What Are the Benefits of Outsourcing Payroll Services to Increase Compliance?

Outsourcing payroll services is an excellent and affordable option. The benefit is that you gain access to a fully qualified payroll expert, but you only pay for the services you need.

And because they’re experienced in their field, they know precisely how to operate payroll software and how to keep your business compliant where pay is concerned. Why do all the hard work yourself when Finvisor can take care of it for you?

At Finvisor, we’ve been supplying outsourced payroll services to our clients for many years because we understand just how vital it is to get this important business function right.

If you’re at all worried about how compliant you are (or aren’t), then why not get in touch today to see how Finvisor can set you on the right path? 

To learn more about what we do, or to request a quote, contact us at hello@finvisor.com or 415-416-6682. We’re here to help you navigate deferred revenue journal entries so you can make the most of your assets!

*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*

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