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Blog » A Step-By-Step Guide to Ensure Payroll Compliance!

A Step-By-Step Guide to Ensure Payroll Compliance!

Last updated: 31 Oct, 2023 By | 6 Minutes Read

Payroll Compliance Guide

A business can succeed and sustain itself in the market only with the hard work and support of its employees. Employees leave no stone unturned when it comes to ensuring maximum productivity and quality in work for business growth and scalability. In short, employees are the backbone of any organization. This makes it a must for employers to take care of their employees in the best manner, and the first thing that comes to our minds is nothing but an efficient payroll process. That’s why we have come up with a payroll compliance guide that will help you stay ahead of the competitors.

However, it is imperative to pay employees timely and accurately, and for choosing a monthly, quarterly, or yearly schedule, calculate taxes, and maintain a record of the entire benefits and earnings of employees. Payroll compliance is nothing but meeting the state and federal law requirements that are in the interest of the employees.

Failing to comply with these laws results in heavy penalties and also puts the business image at risk, which no owner ever wants. So, let us discuss in detail how exactly can employers keep in compliance with payroll laws.

Important 2020 Payroll Law Changes

The year 2020 has some significant changes that will affect payroll procedures and policies in the following ways:

  • The “white collar” exemptions in the Fair Labor Standards Act (FLSA) were increased from $455 per week to $684 per week by The Department of Labor (DOL).
  • For employees who are highly compensated, The DOL increased the total annual compensation amount from $100,000/year to $107,432/year.
  • The DOL has now enabled employers to use incentive pay (including commissions) and bonuses to reach up to the standard salary level of 10%.
  • Form W-4 that is used for employee withholding will be considerably different this year. New forms are needed for new hires and current employees who wish to change their withholding while the same old form can be used for the employees who do not want any changes. The American Payroll Association has clearly explained the differences between the previous and new form versions in a handy chart.
  • The exclusion limits have been increased from $19,000 to $19,500 by the IRS for elective deferrals for 457(b), 403(b), and 401(k) and retirement plans.
  • The voluntary contribution amount from an employee’s salary to healthcare FSAs has moved up from $2,700 to $2,750. Also, the limit amount for contributions to FSAs with respect to employee transportation has moved up from $265 to $270.
  • The EEOC is looking forward to gaining approval for continuing the administration of Component 1 of the EEO-1 survey under the Paperwork Reduction Act. The commission stated it is not having any plans to continue using the EEO-1 Report for collecting the information of Component 2 pay data.
  • The Social Security wage base was increased from $132,900 to $137,700 by The Social Security Administration.

Why Payroll Compliance Matters?

The reason payroll compliance is imperative for every business is to ensure that every employee is treated and compensated in a fair manner by the management. Payroll managers are required to stay updated on the latest state and federal laws to avoid penalties, ensure that employees are satisfied, and efficiently handle payroll processing.

What are the Benefits of Payroll Compliance?

Payroll compliance comes into play right from the day an employee becomes a part of your organization to his last. In other words, payroll compliance is essential throughout the employee lifecycle and comes with the following benefits for both employees and employers.

Benefits for Employers:

  • Protection against fines or penalties
  • Protection against unreasonable demands of the trade union

Benefits for Employees:

  • Ensuring employees get paid fairly
  • Ensuring employees get treated fairly
  • Ensuring employees do not get overexploited

Common Payroll Compliance Mistakes

By taking care of the following common payroll compliance mistakes, employers can stay true in the eyes of employees and regulators:

  • Not reporting taxes on time
  • Failing to meet tax deadlines
  • Not maintaining records
  • Misclassifying contractors
  • Confusing non-exempt and exempt employees
  • Calculating wrong overtime
  • Not taking out taxes for benefits
  • Not depositing on time
  • Overlooking new hire’s paperwork and reporting

    The 6-Step Payroll Compliance Guide

    Step 1: Take Care of Federal Income Tax

    With respect to the payroll compliance requirements for employers, it is vital to withhold a number of different taxes from the paychecks of your employees, and one of such essential taxes is the federal income tax. Employers withhold the paycheck and is essential based on the methods of the IRS, either by a percentage or wage bracket.

    This tax is also relies on the W-4 form exemptions that are ideal for your employees. The federal income tax amount can be between 10% and 37% and should be in the reports of the employee through the annual W-2 form and the IRS.

    Step 2: Meet the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) Guidelines

    FICA or Federal Insurance Contributions Act taxes are essential at the federal level for payroll tax compliance. These taxes comprise Medicare and social security taxes that you should withhold from the paychecks of your employees.

    Apart from this, you are the one who is responsible for paying these taxes on behalf of the employees. It is vital to deposit the FICA taxes on a semiweekly/monthly schedule, with respect to your business, and IRS reporting on a quarterly basis through IRS Form 941.

    When it comes to the FUTA or federal unemployment taxes, employer pay them solely. This tax accounts to 6% and applies against the initial $7,000 that you pay to an employee every year. It is crucial to pay the FUTA taxes on a quarterly basis and file using IRS Form 940.

    Step 3: Take Care of Employee Benefits

    As per the fringe benefits offered by you to your employees, you may be accountable for withholding taxes against these benefits also and report the same on the W-2s of the employees.

    As per the IRS, every fringe benefit one gets from the employer to his employee is taxable and should be in the pay of the recipient. Exclude it if government regulations demand for the same. Some common taxable fringe benefits’ examples include excessive mileage and moving expense reimbursements, clothing, and more.

    Step 4: Classify Employees Appropriately

    Apart from payroll compliance, you need to adhere to other essential regulations as well like classifying employees correctly whom you hire. Your responsibilities are different towards employees and independent contractors, and you need to classify them and provide benefits to them accordingly, along with reimbursing specific expenses.

    This is important with respect to payroll since you should withhold taxes and pay on behalf of your employees, while independent contractors can take care of their own.

    Step 5: Take Care of Fair Labor Standards Act (FLSA) Law

    The FLSA takes into consideration things like recordkeeping, overtime, child labor standards, and minimum wage. It is your duty as an employer to adhere to FLSA rules regarding the same. Out of all these, overtime pay holds a lot of importance from the payroll compliance perspective. As an employer, it is crucial to not only figure out the overtime working employees but pay them and report the same also.

    However, as per the FLSA law, a few employees are exempt from overtime pay which includes professional, administrative, and executive employees who meet specific criteria, farm workers, certain small newspapers’ employees, seasonal recreational or amusement businesses, and more.

    Step 6: Meet State Requirements

    You not only have to meet the federal law requirements but state law requirements as well. The state obligations will vary from state to state, and you must keep payroll compliance concerning your state rules only. Ideally, you will have to report new hires, withhold state income taxes, and follow laws regarding overpay, minimum wage, and any other employee pay.

    Top Payroll Compliance Tips

    • Maintain Personal Records Accurately: It is your duty to maintain the personal records of your employees accurately. Especially. personal information that changes regularly and impacts payroll directly. This includes information related to promotion, payment, maternity leaves, retirement plans, and more.
    • Encourage Employees to give Feedback: Businesses should encourage valuable feedback for payroll improvement. When you identify an issue, conduct workflow analysis by the payroll team, and look for areas of improvement.
    • Adopt a Futuristic Technology Approach: Make sure your payroll software is future-ready by opting for a cloud-based payroll system. This will help you automate the processes, have a single information portal, remove manual errors, and also file taxes automatically.
    • Reconcile Accounts Simultaneously: Although businesses do account reconciliation at the month or quarter-end, reconciling accounts during payday can help. Especially, when you are running a weekly or bi-weekly payroll. This will help save time at large and maximize time-saving. You can also reconcile leave liabilities, important accounts such as superannuation payable and PAYG withholding payable.
    • Register for Legislation Changes’ Alerts: Payroll changes are consistent, especially Awards. It is imperative to know about such changes by registering for alerts to ensure complete payroll compliance. Apart from this, attend seminars and conferences related to payroll discussions to stay updated on the present payroll scenario.
    • Be on Time: Be on time always when it comes to online tax submissions to avoid penalties. Payroll can be challenging owing to paying employees, paying taxes, creating financial reports, and more. It is advisable to create a yearly calendar that lists essential dates for making payments, submitting invoices, timesheets, and more.


    Ensuring payroll compliance by staying updated with the latest payroll laws is a must for businesses. It will not only ensure fair and timely payment but also help you stay away from penalties. Incorporating the use of the latest technology is crucial to streamline the payroll process through automation.

    All this demands a lot of effort and time of business owners, diverting their focus from core operations. On the other hand, having an in-house team can be costly.

    To ensure timely payroll processing accurately as per the latest state and federal laws is outsourcing payroll processing services. This also helps in saving costs associated with payroll set-up, staff salaries, and buying the latest software.

    In case you are looking for one, consider joining hands with Cogneesol. Since 2008, Cogneesol has been delivering top-notch payroll outsourcing services to firms worldwide at affordable costs. Get in touch at [email protected] or +1 833-313-3143 for more details and start your free trial.

    Also Read: Top Payroll Processing Checklist Points to Remember and Follow