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What Is Payroll Compliance? 7 Tips To Navigate Legal Boundaries While Managing Payroll in the US

September 21, 2023

Payroll compliance is an integral aspect of running any business, large or small. It's not just about paying your employees on time; it's about adhering to a complex web of regulations and laws that govern payroll processes. But what exactly is payroll compliance?

In simple terms, payroll compliance is the practice of ensuring that your organization's payroll processes align with the laws and regulations of your country and state. It goes beyond paying your employees accurately and encompasses a wide range of responsibilities, from hiring and classifying employees to tracking hours, calculating taxes, and maintaining proper documentation.

Consider this: A Las Vegas company was recently ordered to repay 593 employees over $3.6 million in back wages, penalties, and damages for Fair Labor Standards Act (FLSA) violations. This staggering figure demonstrates that non-compliance can have severe financial consequences for businesses. In addition, FLSA violations may result in criminal prosecution and even imprisonment. It’s crucial to get your payroll compliance right.

Key Requirements for Payroll Compliance

Payroll compliance involves two fundamental functions: ensuring robust internal payroll processes and ensuring that these processes align with the relevant payroll laws and regulations. Let's break down some of the essential components of payroll compliance:

  • Hiring and classification: Properly classifying employees as exempt or non-exempt under the Fair Labor Standards Act (FLSA) is crucial. Misclassification can lead to underpayment and potential legal issues.
  • Hour tracking: If required, you must accurately track employee hours to ensure proper payment, especially for overtime.
  • Tax calculation: Calculating and withholding the correct amount of taxes, including federal, state, and local taxes, is a vital part of payroll compliance.
  • Documentation: You must maintain proper documentation for tax filings and ensure that employees receive necessary documentation related to their earnings and tax withholdings.

The Legislation Around Payroll Compliance

In addition to knowing the essential requirements, understanding the relevant legislation is paramount to achieving payroll compliance. Here's a quick summary of the important U.S. laws pertaining to payroll compliance:

  • Fair Labor Standards Act (FLSA): The FLSA is a federal law that protects workers against certain unfair pay practices. It establishes minimum wage, overtime pay, child labor standards, and recordkeeping. It also mandates accurate employee classification.
  • Federal Insurance Contributions Act (FICA): FICA governs Social Security and Medicare taxes, which both employees and employers must contribute to.
  • Equal Pay Act (EPA): The EPA prohibits pay discrimination based on gender, ensuring equal pay for equal work.
  • Federal Unemployment Tax Act (FUTA): FUTA requires employers to pay federal unemployment tax to fund unemployment benefits for eligible workers.

7 Best Practices To Ensure Payroll Compliance in the U.S.

Now, let's dive into some best practices to ensure payroll compliance in the United States:

  1. Always classify employees correctly: Ensure that you classify employees as either exempt or non-exempt according to the FLSA guidelines. Exempt employees are not entitled to overtime pay, while non-exempt employees should get this pay. Typically, exempt employees have a salary above a certain level and have particular jobs. Misclassifying employees as exempt when they shouldn’t be can lead to overtime violations and backpay claims.
  2. Know your employees well: You should maintain detailed records of each employee, including personal information, work hours, wage rates, and tax forms. This information is vital for accurate payroll calculations and tax withholding. It’s also important to understand:
  • Employee turnover: Monitor employee turnover rates to comply with laws regarding final paychecks and notice requirements. For instance, some states require employers to pay terminated employees their final wages on their last day of work.
  • Overtime pay: Familiarize yourself with overtime regulations, which often require employers to pay eligible employees for hours worked beyond 40 in a workweek.
  • How you’re paying international employees: If you have international employees, be aware of the tax treaties and laws that affect how you withhold and report taxes. For instance, the IRS has specific guidelines for withholding taxes on payments made to non-resident alien employees.
  1. Manage employee expectations around income tax: Clearly communicate with employees about tax withholdings from their paychecks to avoid misunderstandings and dissatisfaction.
  2. Make sure you track deadlines: Stay vigilant about payroll tax deadlines. For instance, ensure you submit payroll taxes to the IRS and state tax authorities on time to avoid penalties and interest charges.
  3. Keep track of your workplace pension: If your organization offers a pension plan, make sure to comply with all relevant laws and regulations governing retirement plans. Failure to do so can result in penalties and legal consequences.
  4. Stay up to date with payroll compliance legislation: Regularly review updates to federal, state, and local payroll laws and regulations to remain compliant. For example, the IRS may change tax rates or wage limits, impacting your payroll calculations and reporting requirements.
  5. Be aware of international payroll legislation: If your company operates internationally, be mindful of payroll laws and regulations in each country where you have employees. Different countries may have varying rules regarding minimum wage, overtime, and tax obligations.

Incorporating these best practices into your payroll management will ensure compliance with the law and promote a smoother and more transparent payroll process.

Stay Payroll-Compliant With an Employer of Record

Managing payroll compliance is a critical aspect of any organization’s operations. However, it can be complex, especially for startups with limited resources. This complexity and the importance of accurate payroll compliance management underscore the need for an Employer of Record (EOR) like Remofirst.

We understand that startups often face affordability concerns, but compromising on compliance is not an option. That's why Remofirst offers cost-effective EOR solutions designed to ease your compliance burden while keeping your budget in check. Our payroll services are tailored to your specific needs, ensuring that you stay compliant without breaking the bank.

Remofirst can help you navigate the intricacies of payroll compliance effortlessly. Whether you need assistance with classification, tax calculations, or documentation, we've got you covered. Our expert team stays up to date with the latest payroll legislation, allowing you to focus on growing your business.

To learn more about how Remofirst can help you achieve payroll compliance while keeping costs down, visit our FAQ page. We're here to support your payroll needs so you can concentrate on what matters most — running a successful and compliant business.