You start a business, your employees do the work they are assigned, things get done and you pay them right?
It sounds really simple and in a perfect world, but it’s not! When starting a new business, an employer always has to think of a million little things so that their business is running smoothly. A huge part of that smooth sailing is because of the employees who enter the business, have a shared vision with their employer and get things done for that vision. To keep your employees paid on time without any hitch, business owners should adhere to payroll compliance.
“Oh god, not another compliance!” Well yes! There are plenty of compliances that you as a business owner needs to adhere to and payroll is the most important one of all. Adhering to all of the payroll regulations is both a legal obligation and a strategic business move. This ensures smooth operations and is also responsible for employee satisfaction and safeguards the business against potentially costly legal problems.
Payroll is indeed a complex, sometimes confusing but high-stakes task in hand. The compliance requirements usually vary from state to state and even depend on regional regulations. It gets really tough to keep track of them all and make sure to do it right. While you are focusing on growing your business, expanding to different markets and surpassing your competitors, it’s really important to have a well-structured payroll compliance strategy.
Let us make this seemingly complex process simple for you!
What is Payroll Compliance?
Payroll compliance is the process of making sure a business adheres to all legal regulations surrounding the processing of payroll and filing of payroll-related taxes. But what does it include?
It includes federal, state and local level of laws and regulations that governs how employees are paid or how taxes for the employee pay is collected and submitted to the government.
Payroll compliance includes tasks such as:
1: Calculating payroll
2: Paying employees
3: Filing end-of-year payroll taxes and reports
4: Submit withholdings from employee pay
5: Filing payroll-related government forms
6: Submit employer owed payroll taxes
Here are some of the laws related to payroll compliance included:
1: Fair Labor Standards Act (FLSA):
It’s a national minimum wage and overtime rate which ensures the employees are paid fairly for their work. This mandates that nonexempt employees receive no less than the federal minimum wage and one and a half times their regular pay rate for overtime hours which can be over 40 hours per week. This provides specific guidelines for payroll record keeping and regulates child labor.
2: Equal Pay Act (EPA):
This eliminates the wage disparity based on gender. It requires men and women in the same workplace and are given equal pay for equal work which encompasses all forms of compensation.
3: Federal Unemployment Tax Act (FUTA):
It is an employer only payroll tax that is used to fund state workforce agencies. Employers pay this tax annually by filing IRS Form 940. It covers the costs of administering the UI and Job Service programs in all states. The FUTA tax rate is 6.0% and the tax applies to the first $7,000 you paid to each employee as wages during the year.
4: Federal Insurance Contributions Act (FICA)
It is a payroll tax that finances social security and medicare programs. In this regulation, both employers and employees contribute. For this system, the individual’s nine-digit number helps Social Security accurately record the covered wages or self-employment.
Payroll Compliance Checklist:
Lets look at some of the core benefits of mastering payroll compliance:
Protect your team with proper pay and deductions:
It’s important for your employees to know when they are receiving their fair pay, proper deductions and timely payments. This helps strengthen their trust with the company they work for and eventually increase employee loyalty. These compliances help you accurately calculate pay and deductions which ensures that your team is correctly compensated. A small misstep here can lead to legal liabilities and damage morale.
Maintaining compliance with federal, State, and Local Laws:
Yes the Feds are involved! No not the kind you see in CSI shows. The payroll compliance need to follow federal, state and local labor regulations to the letter. This includes understanding minimum wage laws, properly classifying employees, contractors and many more. The more you know the better you can ensure compliance. To do that, it’s really important to understand whats to expect in each layer of law because every level of government has different regulations. Take an hour or so out of your time everyday to learn these regulations upfront. It will save you a lot of time and prevent hefty fines in the long run.
Avoid costly penalties and interest charges:
A well-oiled payroll compliance system is like having a really strong safety net which is designed to catch errors before they lead to financial consequences. This can be done by keeping accurate records, double checking processes, and maintaining awareness of due dates are proactive habits that help you avoid costly mistakes. It’s all about creating a culture of “better safe than sorry” where you can anticipate and address potential risks before they escalate.
Effective payroll process:
Nobody likes and enjoys a pile of paperwork or confusing payroll systems on a Friday night! To avoid that it’s really important to have a clear organised payroll compliance checklist for cutting down on errors and inefficiencies. This will help you spend time on sorting through numerous documents and more time on growing your business.
Must have payroll Items for your compliance:
Here is a closer look at each item and how it helps you maintain regulatory compliance-
Employee Classification (The W-2s and 1099s):
It’s really important to classify your workers correctly, especially in your small business. The employees are classified under W-2 employees or 1099 independent contractors. This distinction impacts how taxes are withheld or reported. To ensure that each new hire completes the correct form and keep these forms on file to show proof of proper classification in case of an audit.
I-9 Verification and Retention:
This verifies that employees are legally allowed to work in the US. Completing and retaining I-9 forms is required for compliance with the immigration laws and all new employees must complete an I-9 within three days of their start date and employees must keep these forms on file for three years from the hire date or one year from the date of termination, whichever comes later.
Payroll Tax Payments and Filings:
Its really important to make sure that you keep the payroll tax payments accurate and timely to keep the business in good standing. Missing this will result in huge interest charges, hefty fines, and legal actions (Harvey Spector can’t save you from this one). To save yourself from this, you can implement a system for calculating, withholding, remitting payroll taxes that helps you stay on top of the tax obligations.
Minimum Wage and Overtime Pay:
Your employees deserve the pay they work for and retention hugely hinges on that factor. Remember, paying below the minimum wage or failing to pay for overtime can result in huge legal troubles, back pay claims and Hugh turnover rates. Staying informed about the federal, state and local wage requirements show your employees that you value what they bring to the table and prevents you from compliance issues. To keep this process smoothly, use a time and attendance software to keep track of the hours your employees have worked for and calculate wages to ensure that employees are paid fairly.
Wage statements and Year-End Tax Forms:
Providing the wage statements and year end tax forms is vital for transparency and helps your employees file their taxes smoothly. A delay or incorrect statement can damage the trust of the employees, lead to legal penalties and can eventually frustrate the entire team.
International Payroll Regulations:
Post covid, the world of businesses have changed significantly in ways nobody could have imagined. Its opened virtual borders for many employees and employers to work in different international firms. In situations like these, these international payroll regulations play a huge role now more than ever. The global market is governed by diverse and often stringent regulations and even organizations that are headquartered in the United States must follow the local, state and national laws wherever their employees are based.
Here are some of the significant international regulations that can impact payroll:
European Union Working Time Directive:
This caps weekly work hours, including overtime, and mandates minimum standards for breaks and paid leave to promote employee health and safety. This enforcement can vary across EU member states, so the implementation can differ by country.
Labor Law In China:
China sets out rules on daily and weekly work hours, employment contracts, wages, labor disputes, working conditions, employee welfare, and overtime. These standards are essential for companies operating in China to understand and follow.
Wages Protection System in the UAE:
Employers in the UAE are required to register with the Ministry of Human Resources and Emiratisation and they are needed to pay employees through the approved financial channels by given deadlines.
UK Employment Rights Act:
This law provides a comprehensive amount of clarity on issues that includes employment contracts, termination notices, protection against unfair dismissal, parental leave and redundancy. This establishes key standards for workplace rights and safeguards employees.
Labor Standards Act in Japan:
The law, in place since 1947, usually updated frequently, covers a wide range of employment issues such as minimum wage, working hours, overtime and paid leave.
German Act on Part-Time Work and Fixed-Term Contracts:
This legislation outlines guidelines for adjusting work hours in fixed-term employment which covers both increases and reductions in working time.
The Cost of Non-Compliance:
There is a huge cost to non-compliance and we are not talking just about the money aspect of it. Here are some potential repercussions companies will face if they fail to meet payroll laws and regulations:
1: As you know non compliance will result in the requirement to issue back payment to employees. This would mean paying wages that should have been disbursed previously which will add up quickly and strain cash flow.
2: When payroll regulations are not followed, companies will be subjected to audits by government agencies. Finding solutions to these problems are often time-consuming and disruptive which will result in fines that increases significantly based on the severity and frequency of the violations.
3: When payroll issues occur, the employees who are putting their sweat and time will feel undervalued or disrespected which will eventually lead to lower morale and even high turnover.
4: Extremely poor payroll management can lead to the loss of much needed employee records and payroll data. It can become excruciatingly time-consuming and cannot always be possible to rebuild this information. This will eventually affect both payroll operations and compliance with record-keeping laws.
Always remember that payroll compliance is one of the most important administrative tasks of any business that has a huge team of talents working for one vision. It’s really important to understand the rules from the day one you pay an employee, which in many cases might include yourself as well. All this information might seem daunting but you can always rely on really good financial team, financial services or payroll software to set up the process and automate most of these processes to make sure that you stay compliant all day long.
So take the time to build a strong payroll compliance system strategy, for your team, your bottom line and most importantly for your peace of mind.
