Payroll compliance means adhering to all federal, state and local regulations that govern how employees are paid. Employers that violate any of these laws may face penalties that could negatively affect their bottom line or even put them out of business. But by learning how to navigate payroll compliance, they can help avoid tax trouble and maintain positive workforce morale. After all, the livelihood of employees and their families depends greatly on receiving secure, accurate and timely payment for their work.
Employers may want to be aware of the following changes for the 2024 tax year:
The laws that govern payroll are extensive. In addition to the various state and local regulations, some of the federal legislation that employers should be aware of includes:
At its most basic level, complying with payroll regulations means:
More specific guidelines pertain to the following aspects of payroll:
Between employee and employer contributions, FICA taxes total 15.3%. Employees pay 1.45% of their gross income to Medicare and another 6.2% to Social Security. Employers must match both, so their tax responsibility is 7.65%. Note that there is a wage-based contribution limit for Social Security, but not Medicare.
Unemployment is funded by employers, not employees. The law requires employers to pay 6% of the FUTA wage base, which is the first $7,000 of an employee’s annual earnings. If a business is also subject to state unemployment tax, it may be eligible for a credit of up to 5.4%, which lowers the FUTA tax rate to 0.6%.
The federal income tax rate currently ranges from the 10% marginal rate to 37% across seven different tax brackets. To determine how much to withhold from employee wages, employers need to refer to each individual’s Form W-4 and follow the instructions in IRS Publication 15-T, Federal Income Tax Withholding.
Employees who are non-exempt from FLSA must be paid the federal minimum wage, which is $7.25 per hour, and are entitled to overtime. The overtime rate is no less than one-and-a-half times their regular pay for each hour over 40 in a workweek. Employers who operate in a state with a higher minimum wage or overtime rate must abide by the state regulations.
Payroll compliance is difficult enough in one state, but as businesses expand into other jurisdictions, the complexity only increases. Some states follow the federal income tax code, others charge a fixed rate or create their own tax brackets, and a few charge no income tax at all. How and when state income taxes are filed and the penalties for noncompliance may also vary from state to state.
In addition to income tax, states have different unemployment tax rates, minimum wage requirements, and disability insurance costs. Check out ADP’s fast wage and tax facts resource to see the specific guidelines in all 50 states and how they compare to the federal government.
A one-size-fits-all approach to payroll won't work for employers that conduct business overseas. The global marketplace is complex and highly regulated, and even if the organization’s headquarters is based in the United States, it must abide by the local, state and country laws where its employees are working. Here are some of the international regulations that may affect how employers process payroll:
Failing to pay employees on time, filing payroll taxes incorrectly or late, and keeping sloppy and incomplete payroll records can be very detrimental to businesses. Some of the consequences employers may experience by not complying with payroll laws and regulations include:
Anyone can enter information incorrectly or misplace a form. Add the fact that payroll regulations and taxes are constantly evolving, and it’s easy to see how payroll mistakes happen. Some of the most common are:
Employees can claim that they are exempt from federal income tax on Form W-4 if they either had no tax liability in the previous year or expect none in the current year. Individuals who sometimes fall into this category are students, part-time or seasonal workers, and those 65 and older or blind. The IRS may ask to review the exemption request, and if they determine that it’s not valid, they will send the employer and the employee a lock-in letter. This document will dictate the employee’s income tax withholding rate, which employers must abide by or their business may be held liable for the back taxes.
Worker classification is important because it determines who has taxes withheld from their pay and who doesn’t. If an individual directs the work being done and how it’s done, but the employer controls the final result of that work, then that person is generally an independent contractor. These types of workers pay self-employment tax, so employers don’t deduct taxes from their earnings. On the other hand, if someone has no control of their work – either what is done or how it’s done – that person is typically an employee and the employer would withhold the required payroll taxes.
The distinction between independent contractors and employees is easily blurred and mistakes are costly. Businesses can face fines and levies for misclassifications and may owe any back taxes or unpaid overtime wages that occurred. If in doubt about a worker’s status, employers should submit Form SS-8 to the IRS.
The Equal Pay Act states that men and women in the same workplace must receive equal pay for equal work. All forms of compensation are covered, including salaries, bonuses, overtime pay, stock options, life insurance and profit-sharing. Employees who think their employer is not complying with this law can file complaints with the Equal Opportunity Commission and bring civil lawsuits against the business.
There are, however, measures that can help prevent gender pay gaps, such as:
Learn how to navigate pay transparency laws and attract and retain talent with equitable pay.
Get ResourcesInsurance premiums for workers’ compensation are based in part on employee classifications, total payroll for each class, and in some cases, total hours worked. Most states require insurance carriers to conduct an annual audit of employers’ policies and if any of their payroll records are incorrect, they may owe additional money towards their premium. These audits usually take place between 30 and 45 days after the policy expires for a given year. Conducting an internal audit before the insurance company performs theirs can help employers address any payroll, timekeeping or job classification errors that might affect their premium.
Many compliance mistakes can be avoided by keeping payroll records in order. Make sure that new hires turn in all the necessary documents and review them carefully for inverted numbers, incomplete or missing data fields, and incorrect dates. Afterward, file the paperwork so it can be easily accessed by both the HR and payroll departments.
Even with meticulous recordkeeping, paper forms can go missing and manual data entry increases the chance of mistakes. A better solution is payroll software. It offers a host of compliance-related benefits, such as:
The following checklist can help ensure that employers have the right data for payroll compliance when onboarding employees. Small business owners can download our Payroll Checklist for a deeper dive.
Payroll compliance refers to the steps every employer must take to abide by the tax regulations, wage and hour rules and other applicable requirements related to payroll. These steps include maintaining the proper forms for each employee, withholding and filing taxes, using the correct tax codes for the business, collecting and filing garnishments, observing federal and state overtime rules, and more.
There are many laws governing payroll at the federal, state, local and international levels. Some of them include:
Complying with payroll regulations is a significant employer responsibility because it:
ADP’s payroll software helps eliminate compliance mistakes by automatically calculating and withholding the right amount of taxes from employee wages and then depositing those funds with the applicable federal, state and local government agencies at the proper time.
ADP SmartCompliance® is a technology and service product designed to help midsized and large businesses manage complex, employment-related compliance requirements, including employment taxes, Form W-2 management, wage payments, wage garnishments, tax credits, employment verification and unemployment claims. The individual modules are customizable and easily scale with an organization as it grows.