As an HR pro, you know that payroll gets “run” every two weeks, but you may not be aware of what the process really entails and how important the issue of compliance is. While it isn’t entirely necessary that you learn the intricacies of the payroll process, there are certain elements of payroll compliance that very much involve HR and thus you should be weighing in on these decisions in order to ensure that the process runs more smoothly.
To best understand where you can help, we have first outlined the most common areas for mistakes in payroll. Outsourcing this responsibility to a Professional Employer Organization is one way to save yourself time and worry to ensure payroll and compliance are a smooth process.
Failing to Comply With FLSA Standards
The Fair Labor Standards Act (FLSA) dictates a number of very important payroll components and deviation from these standards can land you in some serious legal hot water. For example, FLSA sets the federal minimum wage at $7.25, although it should be noted that certain states, cities and municipalities have minimum wage standards that differ from this figure. Further, the FLSA dictates overtime laws, including stipulating that non-exempt employees must be paid 1.5 times their regular rate (also known as “time and a half”) for any work done beyond 40 hours; exempt workers, however, are not entitled to these additional wages (we cover non-exempt vs exempt in the next bullet point). For HR personnel, checking compliance with these facets of the FLSA can be crucial to preventing payroll hiccups. A further, extremely important part of FLSA standards is also record keeping, which we will discuss in further detail below.
Misclassifying Employees as Contractors
As we touched on above, the FLSA also sets the rules for determining employees versus contractors but what does it really matter? Well, knowing whether your employee is an employee or an independent contractor determines whether you withhold taxes and other deductions from their wages – and screwing it up means that the government misses out on that, and they take collecting money very seriously! An employee, for example, gets the regular paychecks, is eligible for overtime, pays taxes and other deductions and ultimately gets a W-2 for taxes, while a contractor is not paid through payroll and is instead compensated as an outside payment (as if you are “buying” a service). Because it isn’t run through payroll, you don’t have to withhold taxes or deductions and you will give them a Form 1099 at the end of the year stating how much you paid them and they file taxes independently based on that amount. A PEO can assist in proper worker classification.
Now, the rules on who is eligible for overtime get murkier. Employees are eligible for overtime as long as they aren’t salaried, make a minimum of $23,600 annually, and don’t have executive, administrative, professional, computer, or outside sales as part of their job position (the US Department of Labor has a great sheet that provides more detail here). The next piece of the puzzle is correctly calculating the actual additional hours worked. “Over time” is classified as any hours worked more than 40 hours in any one workweek, which can be different from a calendar week or even a pay period. However, you can’t carry over those hours or otherwise distribute them to try to avoid giving out payments. Further, the standard rate of overtime is 1.5 times the employees’ usual wage and must be reported on payroll as such.
As part of payroll, you are in charge of withholding certain sums of money from folks’ paychecks for unpaid taxes, child support, outstanding medical bills, and defaulting on loans, among other financial misgivings. These wage garnishments are applied to regular and overtime wages, salaries, sales commissions, and other monetary bonuses; essentially, if they make money at your business, they’re eligible to lose some of it to garnishments, with the exception of tips. In terms of how much to withhold, the amount is determined by the Consumer Credit Protection Act, and your state may also have laws that protect those that have their wages garnished. An advantage of a certified PEO is they stay on top of all these laws have best practices for ensuring compliance.
Failing to Maintain Records
As we touched on in the FLSA bullet point, HR can also assist with record keeping, which is a crucial component of both running payroll and remaining in compliance with FLSA. For example, employers must retain payroll records for at least three years, including information on each employee’s name, social security number (that has been verified!), job position, and details about their compensation, including time worked, deductions and other withholdings. For a full list of records to keep from the US Department of Labor, click here. Now, in terms of how you want to store them, paper is fine, but because it includes sensitive information, any filing cabinet should be secure and locked. Alternatively, an online system that allows you to quickly and easily pull and analyze data is as good (if not better!).
Forgetting to Report Taxes
As a business owner, you must file certain forms in order to remain in compliance with various tax laws. For federal income and FICA taxes, you have to report tax liabilities using Form 941 on a quarterly basis, with deadlines on April 30, July 31, October 31 and January 31. However, some employers may receive the go-ahead from the IRS to instead file annually using Form 944 (with filings due on January 31 for the previous calendar year). Similarly, employers must use Form 940 to file FUTA taxes annually, with a deadline of January 31. State taxes, meanwhile, have different deadlines, so be sure to follow up with the state(s) in which you operate to ensure compliance. A certified PEO has gone through the rigorous process to acquire certification from the Internal Revenue Service and is 100 percent held accountable for federal employment taxes, which protects the you and your business.
Incorrectly Reporting Pre-Tax Vs. Post-Tax Deductions
Some employee deductions are known as pre-tax, meaning that they are taken out of gross earnings before taxes and thus reduce the employee’s tax burden and the employers tax expenses. Examples include workers’ share of health, dental and vision premiums. However, these pre-tax deductions are only allowed if you have a Section 125 plan (S-125) document. If the S-125 document isn’t active, the IRS could make you re-state those deductions as post-tax, leaving you on the hook for a big payout, as well as late penalties and re-filing costs. To ensure compliance, make sure your S-125 plan document is renewed annually.
Missing Deposit Deadlines
With all this filing going on, you’d think that the actual payments for various taxes would follow suit. However, sometimes the filing deadlines don’t match up with the deposit times, resulting in missed payments (and thus late fees and other sanctions). Federal income and FICA taxes, for example, are deposited on a semi-weekly or monthly basis (which you get is based on your lookback period), while FUTA taxes are paid on a quarterly basis unless your tax liability is less than $500 in any one quarter, in which case it carries over to the next quarter. Should you not accrue a total of $500 in that next quarter, it rolls over to the third until you have $500 or more and can make a deposit. Confusing huh? This is why it’s best to have an extra set of eyes on it – in the form of the HR exec – to make sure that payments are being made at the correct time and in the correct amount.