The Importance of Payroll Compliance

The last thing any business wants is to run afoul of federal, state, and local governments. Government officials don’t show up to pay social visits and bring donuts unless they are family members or friends. Adhering to all federal, state, and local regulations governing employees’ pay is an essential business function.

Table of Contents

So what are the applicable laws, why is compliance essential, and what is the best way to stay compliant?

Federal Laws

Several federal laws need to be diligently complied with to avoid some severe pain down the road. They are:

Fair Labor Standards Act (FLSA)

The FLSA is the law that sets the national minimum wage and overtime rates, and it also outlines payroll record-keeping requirements and child labor laws.

Federal Insurance Contributions Act (FICA)

Anyone who processes payroll recognizes FICA as the tax that funds Social Security and Medicare. The employee and employer are obliged to pay half of this tax.

Federal Unemployment Tax Act (FUTA)

FUTA is another type of payroll tax that funds unemployment insurance for workers who have lost their jobs for no-fault.

Equal Pay Act (EPA)

Wage discrimination based on sex is illegal under the EPA. Employers are required to provide equal pay to women and men performing the same jobs in the workplace.

Davis-Bacon Act

Businesses engaged in public works projects must compensate laborers and mechanics at the prevailing wage rate.

State and local requirements

State and local requirements can vary tremendously from one jurisdiction to another. It is hard to manage compliance in one state or local, but the complexity multiplies for businesses operating from several locations.

While some states charge a fixed tax rate or create their own tax brackets, others might follow the federal tax code. Some states charge no state income tax.

Additionally, states can have different requirements for how and when taxes are filed, and penalties for non-compliance can vary tremendously.

That’s just the complexity of income taxes in different states. They also have different minimum wage requirements, disability insurance costs, and unemployment tax rates.

To add to the complexity, some local governments have instituted their own minimum wages and have varying employment laws.

What is the Cost of Non-Compliance?

If a business fails to pay employees on time, keeps sloppy and incomplete records, or incorrectly files payroll taxes, the consequences can be harsh. A few of the consequences companies might face for non-compliance include:

Audits and fines from the different government agencies
Penalties and interest
Decreased morale of employees
Legal fees
Back payment of any missing pay
Data loss

Common Payroll Errors

Complexity piles up as a business expands across jurisdictions, and mistakes can be common. Additionally, adding more employees with different classifications or exemptions increases the likelihood of mistaken non-compliance.

Common errors will include:

Missing payroll tax deadlines
Workman’s comp errors based on the wrong employee classifications or state-mandated rate
Incorrect payroll records due to human error
Misclassifying employees and independent contractors
Misclassified exemptions

Preventing compliance failures

Business owners have so much to keep track of, and keeping track of different employees, payroll tax deadlines, tax rates, and record-keeping can be a tremendous burden. Manual record-keeping is the most common reason employers make mistakes getting payment dates, exemptions, and records to meet compliance requirements.

The more payroll is manually calculated and recorded; the more likely a mistake will happen, resulting in non-compliance. Payroll software is the answer to eliminating errors that result in non-compliance.

With payroll software, each employee is set up with their location, classification, and exemptions, to name a few of the variables that matter. With accurate employee data, a payroll software system provides compliance benefits that include:

Security

Payroll records are protected in the cloud using strong encryption that complies with industry standards.

Automation

The system automatically calculates payroll, unemployment, and workman’s comp amounts, and payment dates met with automatic payments. Forgotten deadlines no longer happen.

Accuracy

Keeping up with the ever-changing regulatory environment is a requirement that invites mistakes for employers operating across states or localities. The payroll software provider ensures that the software stays current with the changing tax and employment regulations.

Meet record-keeping requirements

Correct payroll calculations and time tracking are maintained in the cloud in case of an audit.

Integration

The ability to easily import payroll records into accounting software means correct accounting and reduces errors due to repeatedly entering the necessary information.

Documentation

Onboarding employees requires filling out payroll documents; payroll software will have the forms available.

Payroll Compliance is Essential

There is no doubt that payroll compliance is essential for every company, and nothing should be left to chance. The use of payroll software is the single best way to ensure compliance by preventing the errors and mistakes most responsible for non-compliance.