Payroll compliance is the process of following all state, local, and federal regulations for how employees get paid. Non-compliant employers could face hefty fines and lawsuits.
The tricky part here is understanding all of the different payroll requirements. Compliance refers to a wide range of categories from tax withholdings to overtime pay, employee classification, benefits, and more.
Tracking compliance involves record-keeping, proper forms, expense reimbursement, and even payments for independent contractors. With so much to keep track of, it’s tough for businesses of all sizes to understand how all of this works.
Misinformation and confusion are big problems too. In a recent survey, 45% of small business owners claimed they understood payroll requirements that don’t even exist. And just 45% of small business owners issue W-2 forms to employees, even though this is required by federal law.
Smaller businesses without dedicated HR and payroll teams tend to struggle the most with payroll compliance. Lots of these organizations are using outdated payroll methods and haven’t adopted modern software yet. So it’s never too early to start learning about payroll compliance.
Why Does Payroll Compliance Matter?
Payroll compliance is crucial because it’s so strictly regulated. Labor laws are designed to protect employees, and failure to comply can be costly. Compliance will also keep your employees happy, as they’ll be treated fairly for the work they perform.
What Does Success Look Like?
Successful payroll compliance starts with having accurate employment records. All of your active staff is in the payroll system, classified appropriately, with information and forms up to date.
From here, you need to make sure that your payroll runs are timely and accurate. If your staff is expecting a check or direct deposit bi-weekly and you’re forgetting to run payroll cycles, it’s going to be a problem.
Making sure the salaries, bonuses, wages, overtime pay, tax withholdings, and benefits are calculated properly are all examples of successful payroll compliance.
Beyond the week-to-week aspects of running payroll, you’ll also need to focus on the big-picture components of paying your staff. Things like forgetting to file and report taxes will result in compliance issues. A smooth employee onboarding process helps set you up for success from the beginning.
Sometimes businesses assume they’re compliant because they haven’t received any letters from the IRS, US Department of Labor, or state division of labor standards. But just because your company hasn’t identified noncompliance issues just yet, it doesn’t mean that you’re off the hook. Official government mail or lawsuit from one of your employees could be coming at any moment.
If you want to sleep easy knowing that you’re not in violation of any labor laws or payroll issues, it’s a good idea to work directly with a labor law professional.
Legal counsel can ensure your payroll policies and practices don’t leave you vulnerable to compliance violations.
The end result of payroll compliance looks like happy employees who are paid fairly, on time, and accurately. All of your paperwork and taxes are in order, and you won’t have to worry about getting fined or sued.
An excellent example of payroll compliance in action is a case study on GoVyrl, Inc—a California-based marketing company.
The company’s founder, David Perry, had payroll concerns from day one. He was adamant about locking in a payroll process that could scale beyond the company’s first few hires. This would make it easier for them to stay compliant long-term as the business grew and hired new employees.
At first, the company was tracking accounting and payroll in spreadsheets. But David knew that this wouldn’t be scalable, and they’d have compliance issues if they continued this path.
Another challenge faced by GoVyrl was the fact that they worked with lots of contractors who could only get paid by invoice. The company also had trouble tracking and administering benefits and didn’t have any centralized payroll reports.
In efforts to achieve compliance and scalability, GoVyrl, Inc. implemented Gusto for payroll. By using a modern online payroll system, the company instantly had a clear picture for compliance.
GoVryl was able to properly classify and pay contractors, administer benefits, and get payroll reports all from one platform.
By prioritizing compliance and switching to a modern payroll solution, GoVryl scaled from a startup to 20 employees in just 15 months, all while ensuring all of their payroll was in compliance.
One Secret Weapon To Master Payroll Compliance
Our secret weapon to master payroll compliance is Gusto. In addition to its full-service payroll capabilities, Gusto goes above and beyond to make sure your company stays compliant.
The solution offers automated tax filings, benefits administration, employee self-service tools for accurate record-keeping, and so much more. You’ll even have direct access to Gusto’s HR experts to help you avoid fines and remain compliant.
From labor law policy templates to employee handbooks and more, Gusto has it all. That’s why over 100,000+ businesses rely on Gusto for payroll compliance. Plans start at just $45 per month.
5 Essential Strategies For Payroll Compliance
These are the best strategies to achieve the kind of success that we described earlier. Regardless of your business size or industry, these tips will help you maintain payroll compliance:
Strategy #1: Use Modern Payroll Software
The first thing you need to do is evaluate your payroll processing method. Are you using an old and outdated system?
Too many startups and small businesses rely on manual timecard calculations, handwritten notes, and faxing to process payroll. Not only is this an inefficient use of time, but it opens the door for too many errors.
If your bookkeeper is tallying up hours on a calculator by hand, you can’t be upset when they make a mistake or fail to calculate the right overtime wages. Human error is inevitable with this type of process.
Check out our list of the best payroll services. Once you’ve narrowed down the solution that best fits your needs, the implementation process will be very straightforward.
As described in the case study and identified as our secret weapon, Gusto is a top option to consider here.
Gusto makes it easy for any employer to run payroll in minutes and eliminates manual calculations. The software has time-tracking capabilities, automatic tax calculations, and supports contractor payments.
All of your employee data will be accurately stored here as well. It’s a scalable way to remain compliant for the long term and takes the hassle out of running payroll.
Strategy #2: Improve the Employee Onboarding Process
Lots of payroll compliance issues can be traced back to how an employee was hired. During the hiring process, you need to have employees fill out certain forms so you can get accurate information related to their employment, taxes, and more.
But omitting certain forms or inaccuracies with the forms can create long-term problems. Having your staff fill out forms by hand and relying on an HR rep to manually enter details into the computer is an error-prone approach.
Instead, you can automate the onboarding process with self-service tools and forms. With Gusto, each time an employee is added to the system, they’ll be prompted to fill out their own forms. Things like W-4s and even 1099s for contractors are supported here as well.
Employees can enter their direct deposit information directly in Gusto too.
At any time, your employees can go back and access old pay stubs or payroll information. If they move or some other piece of information changes, it’s easy for them to update all forms online.
Strategy #3: Run a Payroll Audit
Many businesses don’t realize that they have payroll compliance issues until it’s too late. So it’s in your best interest to run a payroll audit right away to evaluate your process.
A payroll audit is conducted internally as a way to assess liabilities and improve the way you process payroll.
One major aspect of a payroll audit is accuracy. You want to verify that the time you’re paying matches the employee’s hours. You’ll also need to verify the accuracy of employee records, active employees, raises, bonuses, employee classifications, and more.
Payroll audits can be a bit time-consuming, but they’re crucial for identifying gaps that lead to non-compliance.
If you find an error or problem during the audit, make sure you act fast. This isn’t something that can wait until next month or next year to address. Fines, penalties, and lawsuits wait for nobody.
After you run the audit, you’ll at least be informed about where you stand for payroll compliance. Even if there are issues that need to be fixed, at least you’re not in the dark about them. Now you can prioritize which areas of your payroll need improvements to remain compliant.
Strategy #4: Create a Payroll Compliance Checklist
A payroll compliance checklist will look a bit different for everyone. That’s because each business has unique needs and will have to follow some rules but not others.
Your location will also have an impact on your compliance checklist. For example, certain states and cities have different minimum wage laws. Whenever there are conflicting regulations, the employer must follow whichever rule is more beneficial to the employee.
The checklist is something that you can keep handy for each pay cycle, new hire, tax filing, and more. Here’s an example of a checklist that you could use for hiring a new employee:
- Fill out W-4 and I-9
- Classify as exempt or non-exempt
- Set up direct deposit
- Report employment information to the state
- Benefits administration
- Update employee database
Having a checklist that’s scalable and repeatable will make your life easier for the long term. You won’t have to worry about compliance as long as you’re crossing off everything on the list.
Strategy #5: Consult With a Professional
Most business owners aren’t payroll experts. Rather than navigating these waters alone and playing a guessing game, consulting with an HR expert will likely be your best option.
A local employment attorney would be the best place to start, as they should have a firm grasp of all employment laws that apply to your business. But you can also take advantage of HR experts offered through various online payroll platforms.
With Gusto’s Concierge plan, you’ll have unlimited access to SHRM and HRCI-certified experts.
These experts specialize in compliance. So whether you just have a one-off question or need assistance with an ongoing issue, it’s helpful to have this resource at your fingertips.
For example, not sure if you need to offer health insurance to your employees? The HR experts at Gusto will evaluate your situation to ensure you’re not violating the Affordable Care Act.
This will help you avoid fines and lawsuits.
Most Common Mistakes of Payroll Compliance
Now that you have a firm grasp of the best strategies to achieve payroll compliance, I want to make sure you avoid common pitfalls. These are the areas where businesses make the most mistakes with payroll compliance:
- Misclassifying employees: Employees must be properly classified as exempt or non-exempt based on criteria outlined by federal, state, and local laws. These classifications determine whether or not the employee is eligible for overtime pay.
- Misclassifying contractors: The tax implications of paying an employee compared to a contractor are very different. Sometimes employers try to reduce their tax liability by incorrectly classing an employee as a contractor.
- Not reporting payroll taxes — A certain amount of everyone’s paycheck must be withheld for payroll taxes. Filings must be reported as well on the right forms to avoid tax penalties from the IRS.
- FLSA violations — The Fair Labor Standards Act is a federal US labor law governing minimum wage, overtime, recordkeeping, and more. Failure to understand FLSA rules usually leads to compliance problems.
- Not maintaining accurate records — Not having the proper payroll paperwork on hand can be a problem if a federal or local agency asks to see them during an audit. It’s much easier to keep track of these records in a digital payroll solution as opposed to burying paperwork in a filing cabinet.
Accurately running payroll and remaining compliant is arguably the biggest responsibility for any employer. Follow the tips, best practices, and payroll compliance strategies outlined in this guide to avoid fines, penalties, and lawsuits. Following this guide will make your life easier and keep your employees happy.