What Is Payroll Compliance? A Quick Guide to Get It Right 

11 minutes read
Learn What Is Payroll Compliance and Why It’s Important

Highlights

  • Keeping up with ever-changing payroll regulations can be a real challenge for employers.
  • Violating wage and hour laws can lead to substantial fines, penalties, and potential legal consequences.
  • With EPAY’s payroll management system, companies can reduce admin work and leave compliance in the hands of experts. Request a demo to see our payroll solution in action!

Maintaining payroll compliance is one of U.S. employers’ greatest responsibilities. Failing to meet regulatory standards can lead to hefty fines, penalties, and legal action. But with ever-changing regulations, staying up-to-date can be a true challenge.

Struggling to navigate payroll compliance? Here’s a quick guide to keep your business safe, maintain employees’ trust, and follow payroll’s best practices.

Let’s dive in!

Discover the Most Common Wage and Hour Violations (And How to Avoid Them)

What Is Payroll Compliance?

Payroll compliance means ensuring that employees are paid following all applicable federal, state, and local regulations. Given the sheer volume of wage and hour laws and the fact that they’re frequently changing, keeping up with payroll compliance is no small feat.

According to the American Payroll Association, payroll compliance includes:

  • Calculating each employee’s earned pay correctly — which can be especially challenging for hourly workers.
  • Executing employee tax withholdings and preparing required reports
  • Withholding benefit contributions, child support, wage garnishments, etc., from employee paychecks and forwarding those funds as directed.

In addition, employers must follow specific protocols regarding how frequently employees are paid, how payments are made, and what specific information must be provided.

Who Sets Payroll Laws?

At the federal level, payroll compliance laws are set by the U.S. Labor Department’s Wage and Hour Division.

The Wage and Hour Division is responsible for enforcing federal payroll laws, which include the Fair Labor Standards Act (FLSA), Federal Income Tax (FIT), federal payroll tax related to Social Security via the Federal Insurance Contributions Act (FICA), and Federal Unemployment Tax Act (FUTA).

In addition, all 50 states have their own wage and hour laws as do many local jurisdictions. In the event of a conflict, federal law supersedes state and local regulations.

Common Wage and Hour Violations

Maintaining payroll compliance means guarding against wage and hour violations, which often include:

  • Failing to pay employees for all compensable work time — Employers must track employees’ work hours and compensate them accordingly.
  • Failing to pay minimum wage, especially when state minimum wages exceed federal requirements.
  • Paying overtime incorrectly — Usually, overtime should be paid 1.5 times more than regular pay.
  • Misclassifying hourly employees as salaried — Hourly employees are typically entitled to overtime pay for hours worked beyond 40 in a workweek, whereas salaried exempt employees must meet specific criteria outlined by the Fair Labor Standards Act (FLSA) to be exempt from overtime pay.
  • Failing to provide wage notices or pay stubs as required — Employees should receive accurate and itemized pay stubs with information such as hours worked, wages earned, and deductions taken.
  • Meal and rest break violations — Not providing required meal and rest breaks to hourly workers or deducting pay for breaks that are not bona fide meal periods.
  • Off-the-clock violations — Not providing compensation for employees doing work-related tasks before or after their scheduled shift.

Employers should be familiar with the most common wage and hour pitfalls to avoid fines, courtrooms, and costly fees.

The Cost of Noncompliance

Payroll violations can result in costly fines and penalties for employers, enforced payment of back wages, and even criminal liability for company leaders. For example, in fiscal year 2023, the Labor Department’s Wage and Hour Division recovered more than $274 million in back wages from employers.

In 2023, wage and hour claims have continued to be one of the most expensive employment law risks. According to a Duane Morris report, class action settlement numbers continue to spike at unprecedented levels:

In 2023, class actions and government enforcement lawsuits garnered more than $51.4 billion in settlements.

Simplify Payroll Processing and Stay Compliant with Payroll Software

How to Maintain Payroll Compliance

To maintain payroll compliance, employers should make sure they’re on top of all relevant federal, state, and local legislation — and that they have a system in place for staying abreast of changes in the law.

Here are a few tips your business can implement to keep up with payroll compliance:

  • Stay updated with ever-changing regulations. Subscribe to relevant newsletters, join industry associations, and regularly review official government websites for updates.
  • Implement robust record-keeping systems. Maintain accurate records of employee hours, wages, deductions, and tax withholdings. Utilize reliable payroll software or systems that automatically track and store this information securely.
  • Classify workers correctly. Properly classify workers as employees or independent contractors according to legal guidelines. Misclassification can lead to penalties and legal liabilities, so carefully assess each worker’s status based on factors such as control over work and financial arrangements.
  • Calculate taxes accurately. Use up-to-date tax tables and software to ensure accuracy and compliance with withholding requirements.
  • File and pay taxes on time. Adhere to deadlines for filing payroll tax returns and remitting withheld taxes to the appropriate government agencies. Late filings or payments can result in penalties and interest charges, so establish a reliable schedule and allocate resources accordingly.
  • Comply with reporting requirements. File required payroll reports, such as Form W-2 for employees and Form 1099 for independent contractors, by the specified deadlines. Failure to submit these forms or inaccuracies in reporting can result in fines and penalties.

Make Payroll and Taxes Easy with EPAY’s Payroll Software

When you run a business, there are many legal obligations regarding wages, taxes, deductions, benefits, and reporting requirements that you must comply with.

This might be overwhelming and too complex to handle — especially for employers managing a hard-to-pay workforce such as hourly paid employees. If that sounds like you, partnering with a payroll software provider can be a game-changer for your business.

At EPAY, we’ve designed a comprehensive payroll software for the hourly workforce. With our payroll processing system and tax filing solution, you can accurately calculate employee taxes across all states and jurisdictions, and make sure you always stay compliant.

Ready to take the stress out of payroll compliance? Get a demo to start powering your payroll and HR processes!


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