Payroll compliance guarantees that you are meeting the state and federal employment law requirements. It also ensures that your employees are getting paid what they deserve on time. 

But, a survey by SurePayroll revealed that many business owners don’t have the right understanding of payroll compliance. It found that: 

  • 45% of small business owners are familiar with obsolete payroll regulations. 
  • Only 36% of small business owners are familiar with the Federal Insurance Contributions Act (FICA). It is a law that mandates payroll deduction for a contribution towards Social Security and Medicare. 
  • 32% of companies have made a payroll mistake at least once. Most of them underpaid an employee. 

This article will explain what payroll compliance is, why it matters, and its benefits. I will also talk about common payroll compliance mistakes and how you can ensure payroll compliance in your organization. 

What is Payroll Compliance? 

Payroll compliance is a legal requirement that requires employers to pay their employees the right amount of remuneration at the right time. However, there’s more to payroll compliance than just paying employees the right amount. 

Here are other things that are included in payroll compliance:

  • Income tax (FICA and the Federal Unemployment Tax Act)
  • Fair Labor Standards Act (FLSA) 
  • Overtime pay
  • Social security and Medicare insurance
  • Vacation allowance
  • Sick pay
  • Maternity pay
  • Holding payroll records for at least three years

Why Payroll Compliance Matters?

Payroll compliance makes sure that employees are compensated (according to their offer letter, overtime, and in line with minimum wage)  and treated fairly. It also ensures that the government is receiving taxes to run the country. 

Risk of Non-Compliance

Non-compliance with payroll regulations could invite penalties and hefty fines from the government. For instance, McDonald’s paid $26 million to settle a California wage lawsuit accusing the company of underpaying its employees.  

West Marine Products, a company specializing in fishing and boating equipment, settled a class-action lawsuit involving 707 former employees. The company underpaid employees by a total of $18,828 over five years. But, the settlement amount was $435,000. 

Non-compliance with payroll regulations also damages the company’s reputation. In turn, this could lead to some of your best employees leaving the organization and clients breaking the partnership. 

Payroll Compliance Benefits

Payroll and statutory compliance is mandatory throughout the employee lifecycle, i.e., from the day of their joining to the day of their leaving the organization. 

Here are the benefits of payroll compliance for both employers and employees:

Benefits for Employers

  • Eliminates the risk of lawsuits or other legal troubles
  • Protects the company from the unreasonable wage demands from the trade union
  • Prevents penalty or fines because of timely payments

Benefits for Employees

  • Ensures employees are compensated fairly
  • Prevents employees from working for very long hours

Common Payroll Compliance Mistakes

Here are some common payroll compliance mistakes that most business owners make:

  • Not filing taxes on time: It is one of the most common payroll compliance mistakes. By not filing taxes on time, you risk getting fined or penalized (depending on your business size and the number of employees). 
  • Miscalculations: It is essential to calculate and deduct the right amount from your employees’ paychecks (as per their salary). Don’t forget to calculate the overtime, bonuses, and commissions.
  • Missing deposit dates: In addition to filing taxes on time, you also need to make payroll tax deposits to FICA and FUTA (Federal Unemployment Tax Act) throughout the year. FICA taxes are usually deposited on a semiweekly or monthly schedule while FUTA taxes are deposited quarterly. 
  • Misclassifying employees as contractors: It is essential to classify employees accurately because the tax implications are different for employees and contractors. Some employers misclassify their employees as individual contractors to reduce their responsibility to pay taxes. Even if it is a mistake, you can be held liable for legal action and penalties. 
  • Confusing exempt and non-exempt employees: The primary difference between exempt and non-exempt employees is that exempt workers are not entitled to overtime pay under FLSA law. These employees include administrative, executive, professional, computer employees, and blue-collar workers. 
  • Failing to maintain records: As mentioned above, employers must keep payroll records for at least three years (for both current and former employees). Failing to do so can be problematic, especially if federal agents or tax agencies want to see them. 

Top Payroll Compliance Tips

Now that you know what payroll compliance is, why it is important, and common mistakes, let’s look at top payroll compliance tips. 

1- Make a Payroll Compliance Checklist

The first and best way for compliance is by creating a payroll checklist specific to your business. It acts as a reference to help you through the process and ensures you don’t miss anything. 

Your payroll compliance checklist should include steps you need to take, laws you need to comply with, forms you need to fill (and when), for each employee and contractor. 

For example, a payroll compliance checklist for new hires might look something like this: 

  • Classify them in the right category (exempt or non-exempt)
  • Complete I-9 and W-4 forms
  • Add the employee to the payroll system for direct deposit
  • Report new hire details to the state
  • Add records to the business database

Another benefit of creating a payroll compliance checklist is that it can be used to train the HR team, accounts team, and other employees involved in the payroll process. 

2- Encourage Employees to Report Incorrect Payments to You

Miscalculations should not happen in the first place. But, it is still essential to encourage your employees to report to you if they feel that they have received improper payments or notice incorrect deductions from their salary. Mistakes can happen anytime, with anyone. 

When they report to you first (and not complain to state agencies), you can:

  •  Fix the mistake asap
  • Find loopholes in your payroll process
  • Avoid hefty penalties and fines

3- Keep an Eye on Legislation Changes

Payroll laws change very often. Even a minor modification in the guidelines could cost you a lot (if you don’t comply with it). Thus, keep an eye on the legislation changes to ensure complete payroll compliance. Also, attend seminars or webinars related to payroll discussions to stay updated with the latest payroll laws. 

4- Hire Professionals

Most businesses hire professionals (accountants, tax advisors, or payroll specialists) to manage their payroll process and ensure compliance. These professionals have the knowledge and expertise to help you set up and manage your payroll systems. 

They can review your calculations, inform you of tax forms and deadlines, offer advice, and complete the necessary paperwork. 

Payroll Compliance (EPF, ESI, Retiral Benefits, and TDS)

Companies with offices and employees in India need to comply with India’s tax regulations apart from US payroll laws. Here is an overview of payroll compliance in India:

  • Provident Fund: It allows employees to save some part of their salary. The provident fund ensures income when the employee retires. Employee provident fund rules state that both the employee and employer must make regular and monthly contributions towards the provident fund. 
  • Employees’ State Insurance Corporation (ESIC): ESIC provides affordable healthcare to employees and their family members. ESIC  law states that companies with more than 20 employees whose monthly income is less than Rs 21,000 should register for the act.  
  • TDS: Tax Deducted at Source (TDS) aims to collect tax from the very source of income. TDS applies to various incomes, including salaries, interest received, commissions, and dividends. Like other deductions, TDS is collected before paying a salary to the employee. 
  • Gratuity: It is a sum of money given by employers to their employees for their contribution to the company. The Payment of the Gratuity Act, 1972 states that Gratuity is applicable to companies with ten or more employees. Gratuity is shown as a part of the CTC (the cost to the company). 

The Role of HR

HRs play an integral role in payroll compliance. Their responsibilities include:

  • Designing salary structures
  • Managing leaves and attendance
  • PF, ESI, and income tax deductions
  • Deciding when to deduct TDS
  • Other deductions, such as additional insurance, loan, etc.
  • Filing taxes
  • Bonus and incentives calculation
  • Maintaining accurate employee pay records
  • Conducting periodic audits to ensure employees are getting paid accurately
  • Staying updated with the latest payroll laws

Conclusion

Payroll compliance is all about meeting the guidelines of the state and federal employment laws. Non-compliance with payroll regulations can invite hefty penalties and fines. Follow the payroll compliance tips mentioned above to avoid lawsuits, improve employee satisfaction, and build a solid reputation. 

How do you ensure payroll compliance in your organization? Did I miss any tips? Let me know in the comments!

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