One of the biggest headaches of any HR department is payroll. It is the place where companies are the most likely to have compliance violations from taxation issues to pay cycles and overtime. Being savvy in this area is vital to business success.
Here are some of the areas of payroll compliance and what they mean.
Pay Cycles
There are several intervals for pay cycles, and each company uses a different one based on their needs and desires. The less frequently you have to process payroll, the easier it is. However, monthly payroll is extremely unpopular with employees and less than 11% of American companies opt for this option.
The majority of companies choose a bi-weekly pay cycle option. This is the easiest to figure, although in some months employees get three paydays instead of two. Bi-monthly pay cycles such as on the 1st and 14th are also popular, but it is a little harder to stay in compliance with overtime rules, and sometimes holidays and weekends will mess with the cycle. The best policy in this case is to pay employees on the day before the weekend or holiday, but sometimes this can make it challenging for employees to schedule bill pay and automatic payments.
Whichever pay cycle you choose, the key is to stick with it and meet your payroll deadlines on time. This way, you keep your employees happy, and avoid penalties from the IRS.
Federal and State Taxes
This is the most common area where employers get in trouble, although the guidelines are pretty simple and there are automated programs and outsourcing options that make this easier. Still, it is important to double check the numbers and make sure taxes are in compliance.
These taxes not only relate to the employee checks, but to what the employer owes for their portion as well. Federal taxes essentially consist of these parts.
- Social Security (FICA)
- Medicare (FICA)
- Employee Withholding
- Federal Unemployment Tax Act (FUTA)
These are the taxes that the employer typically pays a portion of. There are simple tax calculators and apps to make sure these amounts are correct for each employee. The employee chooses their own withholding, which we will talk about in a few moments.
The Local Share
Unfortunately for the sake of both businesses and employees, the Federal system is not the only government entity who want a slice of the financial pie. The state also wants their share, and so do locals like city and even county governments from time to time. The key is to know your local regulations and fall into compliance with them.
Forms
For everything payroll, there is a form of some sort, and you need to have all of the appropriate ones on file, and file some in a timely manner with the IRS to avoid penalties and regulation violations. Here are some of the forms every business should know about.
- 941: This form is an employer’s quarterly tax return form, and most companies who have employees are required to file them. The deadlines are every three months, April 30th, July 31st, October 31st, and January 31st.
- W-2: This is the wage and tax statement issued to the employee annually and filed with the Social Security Administration as well. It is due January 31st each year.
- 1099: This form is used to report a number of things, but relating to employers, it is usually filed for wages paid to an independent contractor who is not an employee.
- W-4: This is the form that the employee uses to select the amount of Federal Tax that is withheld. Employees should review this form whenever they have a change in their tax situation or personal finances.
Of course, there are other forms, but these are the primary ones payroll is concerned with on a regular basis.
Fair Labor Standards Act
The Fair Labor Standards Act is 80 years old, and governs the payment of overtime to employees. It also governs minimum wages and other rules. It has been changed over the years, but some essentials remain the same.
The primary concern is when and how paying overtime is appropriate, and what rate it should be paid at. There are strict timekeeping regulations for non-exempt employees, so be sure you are adhering to all of those. Also, there are standards for salary thresholds and more. This is a complicated topic, but one that it is vital to stay in compliance with. Violations have been known to bankrupt some small businesses.
Payment Methods
The next question becomes how your employees will get their pay. Paper checks, direct deposit, and paycards are all common methods, and each has their advantages. If you have a large number of employees, direct deposit or paycards are the most affordable for you and the easiest for employees. If you are still a small business, paper checks may come with fewer fees and be more affordable for you and your company.
You’ll also want to keep in mind the different rates at which pay is taxed. Bonuses and pay outside of an employee’s normal salary is taxed at a different rate and must be paid separately. These rules vary depending on circumstances, and are often one of the biggest headaches of payroll and HR departments.
PEO Services
Want to outsource your HR? PEO companies go far beyond just payroll processing and handle many of the issues of human resources. If you are a solopreneur or a small company with a rising number of employees, this may be the best solution for you, as payroll rapidly becomes more than a single person can handle.
This is especially true if you don’t have an experienced human resources manager or administrative assistant. Don’t run the risk of getting charged with non-compliance fees with the idea that you can do it on your own.
Conclusion
Payroll is complex. Compliance is essential. Be sure you are aware of everything you need to do to be in within the rules, and if you need help, hire a professional team or outsource to a company. In the end it will be worth it.
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