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:
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:
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:
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.
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.
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 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.
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.
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.
Some of the laws and regulations that relate to payroll compliance in the US are:
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
Here is a handy payroll compliance checklist that you should use for your business:
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:
To stay on top of current payroll laws and regulations, you need to make sure you do the following:
Consult a financial expert in payroll compliance services. Sometimes you need an outside eye to spot errors that internal staff can easily overlook
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:
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.
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.
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.
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?
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 firstname.lastname@example.org 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.*