Payroll Compliance Best Practices

What does payroll compliance mean?

Payroll compliance means meeting federal, state, and local laws and regulations related to payroll, including:

• Withholding, remitting, and reporting federal employment taxes and state and/or local taxes
• Calculating overtime pay
• Meeting minimum wage and equal pay requirements
• Managing paid leave according to federal and state laws
• Meeting final check deadlines upon an employee’s termination
• Paying unemployment taxes
• And more

HR payroll compliance is a team effort, with payroll and tax experts handling the majority of the responsibilities and human resources providing support with functions such as employee classifications and minimum wage requirements (which can vary by state, city, and county.)

As a small to mid-sized business owner, it can be difficult (and costly) to hire an entire team with the expertise needed to fully meet HR and payroll compliance requirements. But there are intricacies in payroll tax that require expert knowledge and attention to detail, and often, business owners don’t know what to ask or the range of rules to follow.

For example:

• Do you know how much you can pay in moving expenses for an employee before taxes kick in?
• Do you know how to tax a bonus payment or whether to tax a stipend an employee has earned?

“Many small to mid-sized businesses owners think they can decide how much to deduct for taxes on a bonus, for example,” says G&A Partners Payroll Manager McKenna Scott. “In many cases, they don’t know what to ask or haven’t been advised on how to handle it properly.”

Even what appears on your employees’ paystubs must adhere to federal and state laws. For example, some states require that sick leave and vacation leave balances appear on paystubs. In addition, your state may regulate how employees are paid. For example, some states require payroll through direct deposit only, and others require that businesses offer two options for employee pay.

When you consider all the requirements and the potential ramifications of not meeting regulations related to payroll compliance, it can start to feel pretty overwhelming. But there are options. When you work with a trusted HR outsourcing provider, such as G&A Partners, you gain access to a team of experts with extensive payroll, tax, compliance and HR knowledge—for about the cost of hiring one full-time employee.

What is a payroll SOP?

PWC’s article, “Payroll SOPs: the key to compliance, accuracy and efficiency,” states that “a payroll standard operating procedure (SOP) outlines the step-by-step processes required when running a payroll operation. It acts as a reference point for the entire end-to-end payroll process.” In short, the payroll SOP helps to ensure payroll compliance, accuracy, and consistency—and ensures employees are paid correctly and on time.

Some important steps usually found in a payroll SOP include:

• Setting up employee records
• Collecting and validating data from multiple sources
• Running and verifying payroll calculations
• Generating payroll reports
• Preparing and releasing payments
• Complying with payroll laws and regulations
• Preparing year-end reports

Processing payroll is complex, and each step requires compliance across multiple regulatory groups. A payroll SOP offers a template for consistency and efficiency – helping your team to handle data coming from multiple sources, including time and attendance information, benefits deductions, garnishments, stipends, and more.

How to ensure payroll compliance

A business that develops and implements payroll compliance best practices can better ensure that the payroll process runs smoothly and accurately—and just as important, these best practices will help you avoid the often costly consequences of noncompliance.

The scope of work required to meet all requirements (and stay compliant), however, can burden many small and mid-sized companies. So, it’s important to put in place procedures and practices that lighten the load while ensuring accuracy.

To help you and your team stay on track, consider the following:

• Create and follow a payroll SOP.
• Pay special attention to payroll processes for new hires.
• Train your payroll staff on compliance requirements and best practices.
• Study the laws and regulations specific to your state and all states in which you have employees.
• Consult an employment law attorney who can keep you updated on the latest payroll-related laws and regulations.
• Consider partnering with a PEO like G&A Partners to ensure regular updates and guidance on compliance changes.
• Create and follow a calendar that includes quarterly and annual deadlines for tax remittance and reporting so that the company maintains payroll tax compliance.
• Determine if you’re using the right technology for your payroll process. Many small to medium-sized businesses still track time with a manual spreadsheet. Moving to an integrated system that includes timekeeping, overtime calculation, and time-off accrual can help reduce errors and save time. An integrated system can also ease the reporting process.
• Routinely check in with remote employees to update their home address. An employee’s specific residence impacts how you process payroll for that employee.

What is payroll tax reporting?

Payroll compliance and reporting go hand in hand. Payroll tax reporting is the process by which companies report wages, tips, and other compensation, plus taxes withheld from those payments.

As an employer, you must withhold federal income tax, Social Security tax, and Medicare tax from your employees’ paychecks. You are also responsible for filing quarterly forms to report withheld federal taxes and report payments for unemployment taxes. In addition, 43 U.S. states plus Washington, D.C., collect income tax. There are also deadlines and requirements for filing a Form W-2 for each employee each year.

Maintaining a calendar of all payroll-related deadlines helps to avoid penalties. And the right technology can make the payroll tax reporting process more accurate and efficient.