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Operations

The Complete Guide to Payroll Compliance

Disclosure: This content is reader-supported, which means if you click on some of our links that we may earn a commission.

Payroll is one of the most important parts of your company. If you don’t have a system established for how to pay your employees, you can find your company falling flat quickly. No one wants to work for free or get paid less than what they were expecting. 

However, anyone who has ever done payroll can tell you there is much more to it than simply paying employees. Keeping compliant is a full-time job in itself–and failing to do so can lead to steep legal and financial penalties.

If you are looking to implement or improve payroll in the future, this guide will come in handy. We cover why payroll compliance is important, quick tips you can implement today to keep your payroll compliant, and some long-term strategies as well.

Why Payroll Compliance Is So Important

It is imperative that you pay your employees in a timely manner and that you pay them the correct amounts. The way that you do this is by ensuring your payroll is compliant. 

Being compliant simply means meeting the state and federal law requirements that exist to protect employees. 

Here are some of the regulations you must comply with: 

  • Social Security taxes
  • Medicaid taxes
  • Employee classification
  • Unemployment taxes
  • Benefits reporting
  • Employee information reporting
  • Tax deposit
  • Paycheck withholdings 

And if you aren’t compliant with your payroll, if you fail to pay your employees on time or pay them incorrectly, you run the risk of being hit with some heavy fines. 

In addition to that, your reputation can be damaged. Disgruntled employees tend to talk and if word gets out that your payroll isn’t compliant, chances are good other employees may consider finding jobs elsewhere. 

In order to help with payroll compliance, you need to make sure that your employees are classified correctly. 

Some classifications include: 

  • Regular full-time employees
  • Regular part-time employees
  • Temporary full-time employees
  • Temporary part-time employees
  • Contractors

In a case study done on a pharmaceutical manufacturing company’s payroll, it was found that many of the employees were not classified in a way that put them in accordance with the regulations set forth by the Fair Labor Standards Act (FLSA). This Act deals with minimum wage and overtime requirements. In other words, it is very important. 

The HR manager of the pharmaceutical manufacturing company knew that the fines they may incur from being noncompliant with FLSA would be high, but she knew she could not manage the problem alone, as she was the company’s only HR professional. Thus, she hired a professional employer organization (G&A Partners). 

G&A conducted an audit to find any compliance issues and found that the number of misclassified employees was much higher than expected. 

G&A Partners was able to aid in fixing those misclassifications and determining how much back pay those employees were owed. 

Though the amount of money the pharmaceutical manufacturing company had to pay in back pay was quite high ($50,000), this amount was less than expected and also got the company’s mistakes cleared before the US Department of Labor got involved, which could have resulted in fines as well as potential future litigation.

Quick Tips to Improve Payroll Compliance Today

Payroll compliance doesn’t have to be complicated. 

It can be fairly easy if you follow some of these quick tips.

Implement a Payroll Service

One of the best ways to improve your payroll compliance is to not rely upon one HR professional to do it all. 

Instead, rely upon a trustworthy payroll service to do much of the work for you. 

There are many great options out there, but one of our favorite ones is ADP.  

This payroll service is best for startups who plan on growing fast but also works well for small businesses, which is why we love this option. 

From the beginning, ADP uses the number of employees your company has to tailor your experience with the service specifically to you, so that you get what you need – no more, no less. 

In addition to payroll, ADP also offers help with: 

  • Time and attendance
  • Talent
  • Benefits and insurance
  • HR services
  • HR outsourcing & PEO
  • Integrations 

There are a few different package options that ADP offers that come with different benefits. 

Essential. Best for startups or established companies that need help with just the basics of payroll. 

Enhanced. This is ADP’s most popular package and offers basic payroll as well as ZipRecruiter, State Unemployment Insurance, and background checks. 

Complete. With this package, you get everything in the Enhanced package plus basic HR support. 

HR Pro. This provides you with everything in the Complete package as well as enhanced HR support and perks for you and your employees. 

To learn the specifics of pricing for your business needs, contact ADP.

Create a Checklist

Checklists can be handy for all sorts of things but especially when it comes to payroll compliance. 

Here are some examples of checklists you may want to create: 

  • New employees
  • New contractors
  • Running payroll
  • Quarterly check
  • Annual check 

Each checklist should outline the steps you need to take to remain compliant. For a new employee, this may include things like completing their I-9 and W-4, adding them to the payroll system, setting up direct deposit, and more. 

These checklists will help to keep you on track but will also help provide your HR team with resources they can use to do payroll.

Keep Accurate Personal Records

This often-underrated task is very important. If done correctly, you can save yourself a lot of time and hassle. 

So take a few extra moments and ensure that you have the correct personal information for each and every employee. This means when you onboard them, but also down the line as well. 

Employees often move, get married, get promoted, etc. so you want to be on top of any personal information changes and reflect those changes in your system. 

Submit Everything On Time

Avoid dealing with penalties and potential investigations by submitting your payroll information by the deadlines. 

This includes: 

  • Quarterly reporting
  • Shifting paydays
  • Tax deadlines

A good way to make sure that you’re not late on anything is to make a calendar that highlights all of the important payroll dates including when timesheets need to be submitted when invoices were submitted and paid, and when you need to run paychecks.

Long-Term Strategies for Payroll Compliance

Not all issues with payroll compliance can be a quick fix or a quick implementation. Some of it takes time to get the hang of.

To help you get a jumpstart, we are providing some long-term strategies that you can begin working into your company today to hopefully avoid any headaches down the road.

Understand the Different Regulations

Before you dive into payroll, it is important that you first understand the universal regulations. 

Withholding Federal Income Tax

One of the taxes that you must withhold from your employees’ paychecks is the federal income tax. This is taken out of every paycheck and the amount is determined by the IRS either by which wage bracket your employees fall into or a percentage. 

You also need to take into account the exemption your employees claimed on their W-4 to complete this. 

Typically, the federal income tax is somewhere between 10% and 37% and is reported on the W-2 form. 

Withholding FICA Taxes and FUTA

The Federal Insurance Contributions Act (FICA) has taxes that are mandatory for tax compliance. These taxes are Medicare and Social Security, and it is your responsibility to withhold these taxes from your employees’ paychecks. 

Not only do you need to withhold these taxes, but you need to deposit them semi-weekly or monthly, depending on the type of business you own. 

In addition to that, you also need to pay Federal Unemployment Tax Act (FUTA) taxes. This amount is 6% and must be paid quarterly. 

Withholding Fringe Benefits

Fringe benefits are additional benefits an employee gets that are required to be withheld. They include things such as moving expense reimbursements, clothing, and more. 

These benefits are taxable and must be reflected in the employee’s paycheck as well as on their W-2s. 

State Requirements

The above is all about federal law requirements, but state law requirements are part of the payroll process as well. 

What is required by each state varies from state to state so be sure you are aware of the payroll compliance laws in the state that you run your business.

These rules typically include things such as: 

  • Reporting new hires
  • State income tax
  • Minimum wage
  • Overpay
  • Benefits

Ask Employees for Feedback

One of the best ways to avoid any payroll issues is to allow your employees to share their thoughts on how payroll is done. 

This allows you to see where there may be some hiccups in the payroll process, and what you can do to smooth them out. Plus, it gives your employees a voice in how things are done, which is very important. This lets them know that they are part of the company and not just employees of it.  

You can do something as simple as an email survey that you send out to everyone, or you could schedule a meeting where people have some time to voice concerns about payroll processes.

Reconcile Accounts Regularly

Though HR should be doing account reconciliation at the end of the quarter or end of the month, you may consider having your time reconcile accounts every time you run paychecks. 

This can help to catch mistakes as they are made, as opposed to waiting for them to pile up only to have to sort through that stack down the line. 

It may take a bit of extra time each pay run, but will save you time in the long run and will make sure you’re on track for payroll compliance.

Use Audit Trails

Audit trails can protect your company if you ever get audited. 

Audit trails allow you to link every transaction you make with additional information including invoices. This helps to make any questionable payments valid as well as protect you against fraud. 

ADP offers audit trails with some of its packages, so if this sounds like something your company may need, make sure you get the correct ADP package.

Stay On Top of Payroll Legislation

Since payroll legislation determines the laws surrounding payroll, you must stay on track with any changes that they have made. This is an added layer of protection to keep you from being non-compliant. 

The best way to keep up with changes in payroll legislation is to attend seminars and webinars. These events not only cover changes in legislation but often also provide advice on payroll procedures that you stand to benefit a great deal from. 

You can also register for alerts that let you know when legislation changes regarding payroll are made.

Hire an Accountant

If you feel like things with your company’s payroll are getting too complicated, let an expert guide you. 

Accountants are a wealth of knowledge when it comes to payroll compliance and can help you with all the regulations involved. 

Not to mention, they are there to help with the tax part of things including filing your return and keeping records current.

Next Steps

Payroll doesn’t have to be overly complicated as long as you remain compliant. You may need to take a few extra steps to ensure that you are on the right track, but trust us–it is well worth your time and effort and has the potential to save you a lot of money. 

Since keeping accurate records of your employees is a crucial part of payroll compliance, consider implementing onboarding software that can help you keep track of all your new hires’ information. Here are our top picks for onboarding software

You always want to pay your employees the right amount to keep them happy (which in turn keeps the company happy), so you may want to look at investing in a time and attendance system. This can help you with timesheets, clock-ins, tracking, and compliance so you don’t have to do everything manually. Take a look at our review of the best time and attendance systems here


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