Why should you care about payroll compliance? If you don’t pay attention to the regulations, you could face fines, audits, and other not-so-fun consequences. Plus, doing payroll properly helps ensure your employees get paid right and on time. This article provides an overview of payroll compliance basics, considerations, common errors, and tips to avoid issues.
So, how do you stay on the right side of payroll compliance?
- Correct Wages: Make sure you’re calculating and paying employees accurate wages.
- Pay Your Taxes: Pay your taxes on time and file any returns.
- Withholdings: Take out the right amount of payroll taxes such as Social Security, FICA, and FUTA.
Keep in mind that the location of your employee can impact how you calculate all three of these factors.
What are the major payroll compliance regulations and taxes to be aware of?Due to the many laws, regulations, and taxes related to payroll, we’re just going to highlight some of the big ones to be aware of:
- Equal Pay Act (EPA): EPA is in place to help ensure employees receive equal pay, regardless of their gender.
- Fair Labor Standards Act (FLSA): FLSA defines the national minimum wage, overtime rates, reporting, and other important details related to pay.
- Federal Income Tax: Federal income is taxed on a sliding scale, going from 10% up to 37% with seven different tax brackets. To figure out how much to take from your employee’s paychecks review the IRS’s Publication 15-T.
- Federal Insurance Contributions Acts (FICA): FICA is a payroll tax that goes towards Social Security and Medicare.
- Federal Unemployment Tax Act (FUTA): FUTA is another payroll tax. Its purpose is to fund unemployment compensation for workers who lose their jobs.
Payroll compliance considerations beyond the federal level
- State & Local: In addition to federal payroll compliance, each state has its own tax code, unemployment rates, minimum wages, and more. Be sure to check out your state and local regulations.
- International: If your business operates internationally, get ready for a whole new set of rules. Here are a few of the major ones:
- North American Agreement on Labor Cooperation (NAALC): NAALC aims to ensure that labor rights are upheld in the United States, Canada, and Mexico.
- Wages Protection System of the United Arab Emirates (WPS): In the UAE, the Wages Protection System (WPS) requires businesses to sign up with the Ministry of Human Resources and Emiratisation and pay their employees through an authorized financial institution. If a business doesn’t register or misses payment deadlines, their work permits could be at risk.
- UK Employment Rights Act: The UK Employment Rights Act lays down the rules for things like work contracts, fair notice if an employee is let go, parental leave, and what happens in case of layoffs.
- European Union Working Time Directive (WTD): WTD is designed to protect employee wellbeing by setting weekly work hour limits, break times, and paid leave standards. However, each country might put its own twist on the details.
- Labor Law of the People’s Republic of China: This law is in place to limit daily and weekly hours, and covers contracts, wages, working conditions, and overtime.
- Labor Standards Act of Japan: The Labor Standards Act of Japan covers regulations related to minimum wage, work hours, overtime, paid leave, and other employment-related matters.
- German Act on Part-Time Work and Fixed-Term Contracts: This act provides guidance for increasing or reducing work hours during fixed-term employment.
Payroll Compliance Mistakes & Repercussions
Everyone makes mistakes, right? However, payroll compliance mistakes can be costly for your business.
What are the most common payroll compliance mistakes?
- Equal Pay Act Violation: Make sure you are in compliance with this act or you could face complaints and lawsuits.
- Workers’ compensation errors: Mistakes here can mean shelling out more for insurance.
- Errors with exemptions: Be very careful with tax exemptions; the IRS takes mistakes very seriously.
- Misclassifying employees vs. contractors: This one’s tricky in some scenarios, and it can cost you big time.
So, how do you avoid these payroll mistakes?
- Keep rock-solid records.
- Use payroll software to automate and stay accurate.
- Take advantage of software integrations and tools that help automate data transfer to reduce errors.
- Double-check everything.
- Know your state, local, and international laws.
- Ensure new hires fill out the right paperwork.
What happens if you don’t adhere to payroll compliance?
- You could face penalties and interest on unpaid taxes.
- There may be legal implications.
- You might have to backpay your employees.
- You may be subject to audits and fines.
That’s the lowdown on payroll compliance for 2023. Remember, play by the rules, and you’ll keep your employees happy and your business running smoothly.