Payroll Compliance – what is it and why do I need it?
To ensure that employees are correctly and securely paid, you must follow all federal, state, and local regulations. In doing so, you are payroll compliant, keeping your business and employees out of trouble with the IRS and state/federal labor laws. Payroll compliance begins when the employee is hired and continues even after they leave the company.
Running a successful payroll can be complex as state and federal regulations are constantly changing. It can be a lot of effort to keep up with the constant change, so looking to an outsourced solution, such as Dominion Payroll, can alleviate that burden and allow you to get back to business.
Keeping up with that change requires a few steps:
- Employee status changes
When your employees move, change a phone number, get married, etc. all of those changes need to be updated for company records.
- Employee Classification
Is your employee full-time, part-time, or an independent contractor? This classification is important to differentiate when taking out taxes. Independent contractors are typically responsible for paying federal, state, and local income tax and are subject to self-employment tax (Social Security and Medicare).
- Create a checklist
A good way to track if you are in compliance is to keep a list of things to go through. This helps tremendously when you are doing payroll. A little organization goes a long way.
Don’t know where to start?
Download our compliance checklist for you to reference as you build out once curated for your business.
- Stay current
Keep up with changes. Attend webinars, read articles and seek advice from experts in the industry. This will alert you to any changes so that you can be prepared and know what to expect. Keep up with legislation by following news on the IRS website and major laws for Department of Labor.
- Software can help
There are software providers available that can make your life easier, such as Dominion Payroll. Using this payroll tool you can be assured that all data is properly input and the sequence of steps are followed correctly. An outsourced service will process, file, and pay all payroll related taxes to the appropriate agencies, giving you the benefit of financial and process security for all your payroll tax needs.
So what are some areas to look out for? Here are some heavy-hitters to include on your checklist and what they mean:
COBRA (Consolidated Omnibus Budget Reconciliation Act)
The continuation of a group health plan is offered when someone goes through life events such as reduced work hours, in-between jobs, divorce, death, or losing a job. Think of it as a healthcare plan extension where the plan would, at any other time, terminate.
ERISA (Employee Retirement Income Security Act)
Provides protection by setting the standard for individuals for retirement and health plans. This includes profit-sharing plans, pensions, withheld or delayed compensation plans, and 401(k)s. This Act protects the retirement assets of workers so that a person or organization can’t misuse their responsibility for managing that person’s wealth.
State and Federal Continuation
Just like federal requirements, state elections bring on new state laws and changes. For this, you will need to keep up with the payroll laws and regulations that are in your state and on a federal level. FLSA would fall under this category.
POP (Section 125 Premium Only Plans)
An employer may take out a portion of the company-offered insurance premium from the employee’s paycheck before tax is taken. Life Insurance, Vision, Healthcare, Disability, and Dental all qualify under these types of benefits. HSA qualifies under this plan.
ACA (Affordable Care Act)
The ACA promotes affordable health insurance to people that qualify. It was created to allow more people to get healthcare and is made possible through premium tax credits and special enrollment opportunities.
What happens if you aren’t payroll compliant?
Without proper compliance you are exposed to possible IRS excise tax issues, ERISA penalties, Department of Labor lawsuits, litigation, and becoming self-insured for claims. You reduce risk and protect your company when you manage your compliance properly.
And who doesn’t want to avoid audits, excise taxes, penalties, and in some cases litigation or even… jail time?
Mythbuster – Can you guess the myth?
1. When the IRS performs a compliance check, they determine tax liability.
2. You have the right to refuse a compliance check from the IRS.
3. It is your responsibility as an employer to withhold taxes from your employees.
The myth is…. Number 1!
The IRS does not actually determine tax liability from a compliance check. The check is more of a ‘check-in’ to see if you, as an employer, adhere to proper recordkeeping and requirements. With an audit and examination, your records would be looked into, making sure you are paying your employees fairly and accurately.
There is no penalty to deny a compliance check, though it benefits you to perform one. Even though you can object to a check, it does not mean you should. The IRS may choose to open a formal investigation of your company. Any red flags that come up, you can deal with and educate your staff to avoid future penalties.
Withholding taxes from your employees is extremely important. It prevents a massive check they would otherwise pay during tax season by taking a percentage out of each paycheck. This makes it more affordable for employees to pay taxes yearly, cutting down on tax evasion. This helps to avoid lawsuits that employees or government agencies might file against you.
Have more questions?
Our subject matter experts are skilled at turning highly complex rules and regulations into practical and understandable answers. We do the heavy lifting so that you don’t have to.
Have questions? Chat with us to learn more.