A big part of managing payroll in an organization is making sure to comply with tax laws, compensation requirements, and employment regulations. But apart from these obvious compliance challenges, payroll compliance also touches on various other aspects such as respecting the deadlines for reporting and submitting withheld payroll taxes or making payroll GDPR-compliant. Let’s have a closer look at what payroll compliance entails and how businesses can ensure they tick all the boxes on their payroll compliance checklist.
Payroll compliance means following and respecting all the existing rules and restrictions that govern payroll—and that not only on federal but also on state and local level. It encompasses many different areas. Organizations that want to make sure their payroll operations are compliant with all the official regulations should pay close attention to:
Tax laws
Data protection regulations like GDPR
Tax filing requirements and deadlines
Government reporting of payroll taxes and social security contributions
Employment laws, such as overtime limits
Compensation rules, e.g. minimum wage rates and legally prescribed pay frequency
Rules for workers’ classification
Mandatory insurance coverage and contributions, e.g. workers’ compensation
Pay equity laws
Payslip requirements
Payroll record keeping requirements
Mandatory payroll deductions
Registration requirements for new hires
Needless to say that payroll compliance is a complex topic, and it gets even more complicated in countries like the United States or India where, on top of the federal legislation, there are also different state laws to consider.
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Whether it’s payroll, corporate taxation, business permits, or any other aspect of business, compliance is a risky game which can have severe repercussions on the financial, legal and reputational level. Steep fines, lawsuits, and a severely damaged company reputation are just some of the many bad consequences that can arise if an organization fails to comply with payroll laws.
Among all the different compliance areas, however, payroll compliance is of special importance. That’s because payroll is highly regulated, and the fact that there are several different sets of law that influence payroll only makes it more complicated to keep up with legal changes. What’s more, the consequences of noncompliance in payroll are severe and can include:
Fines and other financial penalties
Back payment of taxes and wages
High legal fees
In-depth payroll compliance audits
Lawsuits for wrong compensation or false declarations
High employee turnover and low employee morale
Forced business closure
Criminal prosecution and even imprisonment
Payroll compliance is a continuous task for the payroll function. But even the best preparation and sound knowledge of tax laws, filing deadlines, and more can’t stop errors from occurring. Here are some of the most common mistakes that can cause noncompliance with payroll laws and regulations:
Not respecting minimum wage requirements
Going over the legal limit for overtime
Missing deadlines for payroll reporting and tax filing
Failing to guarantee equal pay for equal work
Misclassifying employees as independent contractors
Forgetting to keep detailed payroll records for each employee
Registering new hires only after the first payroll run
Wrongful payroll calculations
Late salary payments
As we’ve seen, there are many things that can go wrong in payroll. But what can businesses do to prevent payroll compliance issues from arising? Here’s a checklist to help you remain compliant from the moment you hire your first employee:
Set up a payroll and compliance calendar
Use a checklist to avoid employee misclassification
Choose a pay frequency and compensation structure in line with official regulations
Carefully check all the documents and forms when hiring new employees
Work out clear protocols for the legal onboarding of new joiners
Add new hires to the payroll system from day one
Arrange payroll compliance training for your team
Make sure your payroll system is secure
Check for additional payroll regulations on state or local level
Invest in payroll software and automate as many processes as you can
Familiarize yourself with existing payroll laws and regulations
Set reminders to check for updates and changes to existing legislation
If needed, get external help to ensure payroll tax compliance
Schedule regular audits for all your payroll processes
The Lano Academy is for informational purposes only and should not be construed as legal advice. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this article.
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