Payroll Compliance: Getting It Right

Learn about payroll practices employers should implement and maintain in order to stay compliant.

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Checklist for maintaining payroll compliance

The fallout from failing to comply with payroll laws can be staggering. For this reason, payroll compliance should be top priority for all employers.

But what exactly is payroll compliance? And how can you achieve it on a continuous basis?

Below are answers to questions about payroll compliance, plus tips for obtaining and maintaining compliance.

What is payroll compliance?

Payroll compliance means obeying all applicable federal, state, and local payroll-related laws and requirements.

Payroll compliance means obeying all applicable federal, state, and local payroll-related laws and requirements. Some of the most common federal payroll-related laws include:

  • Fair Labor Standards Act (FLSA) — which governs minimum wage, overtime, recordkeeping, and child labor
  • Federal Insurance Contributions Act (FICA) — which authorizes the collection of Social Security tax and Medicare tax
  • Equal Pay Act (EPA) — which prohibits wage discrimination on the basis of sex.
  • Federal Unemployment Tax Act (FUTA) — which regulates the collection of federal unemployment tax

However, that’s barely scratching the surface of payroll compliance. There are many other federal payroll laws plus state (and sometimes local) payroll statutes. Typically, these laws revolve around wages and hours, payroll taxes, and employee benefits.

For multinational companies, payroll compliance can be very complex because international payroll laws must be considered.

What is wage compliance?

Wage compliance is a subset of payroll compliance. Whereas payroll compliance deals with meeting all legally required payroll requirements, wage compliance is about following the laws that apply to employees’ wages.

Wage compliance boils down to ensuring employees are paid accurately and on time. Achieving that outcome is far more multifaceted than it sounds. This is because wage compliance has many components, including:

  • Scheduling
  • Timekeeping
  • Minimum wage
  • Overtime
  • Meal and break periods
  • Premium pay
  • Paid or unpaid time off from work
  • Recordkeeping
  • Minimum paydays
  • Pay stubs
  • Final paychecks
  • Mandatory payroll deductions
  • Voluntary payroll deductions
  • Independent contractor vs. employee
  • Nonexempt employee vs. exempt employee
  • Wage reporting to government agencies

Why is payroll compliance important?

One of the top reasons is that employers can face penalties and fines for not following applicable payroll laws.

Penalties and fines vary according to:

  • Type of violation
  • Frequency of the violation
  • Whether the violation was intentional or unintentional
  • How long the employer has been noncompliant
  • Impact of the noncompliant action (such as on affected employees)

Depending on the severity of the violation, an employer can face criminal prosecution and imprisonment. This has happened to employers who evade their payroll tax obligations. The same goes for employers who willfully avoid paying their employees for work performed.

The repercussions of payroll noncompliance do not come only from government entities. Consequences can also materialize in the form of disgruntled employees, high turnover, and reputational harm. The bottom line is that if your employees are dissatisfied with your payroll practices, they may leave and publicly air their grievances.

The best way to avoid running afoul of the law and ruffling your employees’ feathers is to mount a system that promotes ongoing payroll compliance.

Depending on the severity of the violation, an employer can face criminal prosecution and imprisonment. This has happened to employers who evade their payroll tax obligations.

How do you ensure payroll compliance?

Below are best practices to help you maintain compliant payroll practices.

Gain a general understanding of payroll 

Regardless of whether you process payroll in-house or outsource it, you should know the fundamentals of payroll. This includes the:

  • Purpose and importance of payroll
  • Various elements of payroll (e.g., wages, deductions, taxes, reporting)
  • Different governmental bodies (e.g., federal, state, local, international)
  • Dangers of not executing your payroll obligations

To learn about payroll:

  • Take advantage of informational resources offered by your payroll provider (if you have one).
  • Ask your CPA to explain the basics of payroll, including wages, taxes, and reporting.
  • Review the administering agency’s website — such as the websites for the U.S. Department of Labor, Internal Revenue Service, state department of labor, and state taxation agency.
  • Hire a payroll consultant to teach you the essentials of payroll.

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Determine which payroll regulations your business must follow

This is the official start to payroll compliance. After all, you cannot obtain compliance if you don’t know what you should comply with.

You will need to find out which federal, state, and local payroll laws apply to your business. Keep in mind, as well, that payroll is closely connected to human resources and finance. So, you must consider not only actual payroll laws but also more subtle, related ones. Figuring out your payroll obligations gets even harder if you have employees in different states or countries.

To ensure accurate interpretation of payroll laws, consult with your payroll provider or an employment attorney.

Implement and maintain compliant payroll practices

Once you know your payroll requirements, you will need to implement and maintain them in the most efficient and effective way. Below are some tips to accomplish this.

  • Make payroll technology a must. If you do payroll in-house, payroll technology is imperative. Without it, your payroll processes are likely to be chaotic, time-sapping, and vulnerable to errors.
  • Select payroll technology that facilitates the following: onboarding, scheduling, time and labor, payroll processing, benefits administration, payroll tax administration, and recordkeeping.
  • Keep track of applicable payroll laws. You will need to look out for any changes in the laws you’re currently following, plus enactment of new legislations. This is another reason why payroll technology is so important. Compliance developments are often updated in the technology. That said, do not depend on payroll technology to keep you abreast of every update. Your payroll team, as well, must be vigilant.
  • Establish sturdy payroll internal controls. These controls typically include payroll authorization processes, payroll security measures, segregation of duties, and procedures for receiving accurate and timely payroll information.
  • Audit your payrolls regularly. This involves verifying timecards, gross-to-net wages, payroll tax filings, wage reports, and payroll accounting records. Audits also give you an opportunity to assess the strengths and weaknesses of your payroll system, policies, and procedures.
  • Work closely with your human resources and finance teams. These departments share many overlapping duties with payroll.

Additionally, your payroll employees should be knowledgeable, detail-oriented, reliable, trustworthy, and committed to excellence in payroll service delivery.

Outsource your payroll, if necessary

If you decide to outsource payroll, make sure the service provider has professionals who are experts in payroll administration/management. You want a provider who alleviates compliance headaches, not one who creates them. The same goes when seeking a payroll technology vendor.

Zenefits payroll places compliance front and center. Along with that, Zenefits offers advisory HR and payroll services — which means you’re not alone when traveling the bumpy road to payroll compliance.

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