Navigating Payroll Compliance: Essential Updates and Best Practices

Payroll compliance is one of the most critical aspects of running a business, ensuring that employees are paid accurately and on time, while the company remains compliant with state and federal regulations. Failing to meet these requirements can result in costly fines and damage to your business’s reputation. Here are the key updates in payroll compliance and best practices you should follow in 2024.

1. Federal and State Wage Law Compliance

The minimum wage and overtime pay rates are fundamental to payroll compliance, but these rates often differ between federal and state laws. While the federal minimum wage remains at $7.25 per hour, several states and cities have enacted higher minimum wage rates. Additionally, many jurisdictions adjust their minimum wage annually based on inflation.

What to Do:

• Check Local Laws: Ensure you’re compliant with both federal and state minimum wage laws. If your business operates in multiple states, confirm that you’re meeting each location’s wage requirements.
• Overtime Rules: Employees classified as non-exempt under the Fair Labor Standards Act (FLSA) are entitled to overtime pay. Be aware of state-specific overtime rules, which may differ from federal regulations.

2. Employee Classification: Avoiding Misclassification Issues

One of the most common payroll compliance mistakes is the misclassification of employees as independent contractors. This issue can lead to back wages, penalties, and additional taxes owed if found non-compliant during an audit. Independent contractors are not subject to minimum wage or overtime pay, while employees are, which is why proper classification is crucial.

What to Do:

• Review Employee Status: Ensure all workers are correctly classified based on IRS guidelines. Independent contractors should meet the criteria for self-employment, and employees must be given the appropriate benefits and payroll processing.
• Use IRS Form SS-8: If you’re unsure about the classification, you can file this form with the IRS to determine the correct worker status.

3. Payroll Tax Compliance: Meeting IRS Requirements

One of the most vital components of payroll compliance is ensuring that payroll taxes are properly calculated, withheld, and remitted to the IRS and state agencies. This includes federal income tax, Social Security, Medicare taxes, and any applicable state and local taxes.

What to Do:

• File Taxes on Time: The IRS has strict deadlines for depositing payroll taxes, typically semi-weekly or monthly. Late payments can result in significant penalties.
• Track Employee Deductions: Ensure that the correct amount is withheld from each employee’s paycheck for federal and state income taxes, as well as contributions to Social Security and Medicare.
• Keep Records: Maintain accurate records of payroll tax filings, including IRS Form 941 (Employer’s Quarterly Federal Tax Return), W-2s for employees, and 1099s for independent contractors.

4. ACA Compliance: Affordable Care Act Requirements

The Affordable Care Act (ACA) requires that businesses with 50 or more full-time equivalent (FTE) employees offer affordable health insurance coverage. Failure to comply with ACA requirements can result in penalties under the Employer Shared Responsibility Provisions.

What to Do:

• Determine Applicable Large Employer (ALE) Status: If your business qualifies as an ALE, ensure you are offering health insurance that meets ACA standards for affordability and coverage.
• File Forms 1094-C and 1095-C: These forms must be filed annually to report information about health insurance coverage offered to employees.

5. Overtime Pay Updates and Exemptions

Ensuring proper overtime pay for non-exempt employees is essential. The Department of Labor (DOL) has been updating guidelines for the exemption threshold. Employees earning below a certain salary must be paid overtime for hours worked beyond 40 in a week.

What to Do:

• Review Exempt Employee Salaries: Ensure that exempt employees’ salaries meet the updated minimum threshold to maintain their exemption status.
• Track Hours Accurately: Implement a robust timekeeping system to accurately track hours worked by non-exempt employees and calculate overtime.

6. Payroll Recordkeeping Requirements

Accurate recordkeeping is an essential part of payroll compliance. Employers must maintain payroll records for a minimum number of years, depending on the jurisdiction, but federal law requires that records related to wages, deductions, and other payroll details be kept for at least three years.

What to Do:

• Digital Payroll Systems: Utilize payroll software to maintain accurate, up-to-date records, including pay stubs, employee hours, tax withholdings, and benefits.
• Audit Regularly: Conduct internal audits of your payroll records to ensure accuracy and compliance with the FLSA and other applicable regulations.

7. State-Specific Payroll Compliance

Many states have additional payroll compliance requirements beyond federal law. This may include specific regulations around paid sick leave, paid family leave, and other employee benefits.

What to Do:

Meet Paid Leave Requirements: Ensure that you are meeting your state’s requirements for paid sick leave, vacation accrual, and paid family leave.

Stay Updated on State Laws: Regularly review state-specific payroll compliance laws, especially if you have employees working in multiple states.