A Complete Guide to Payroll Compliance in 2024

Every year brings the potential for new employment laws. And legislation that affects payroll is no exception.

For employers, failing to ensure payroll compliance opens the door to issues like:

• costly noncompliance fees
• untimely audits and other penalties
• trust-breaking mistakes

Compliant payroll may seem like a tall order — because it is. At the same time, it’s necessary to ensure the long-term success of a business and fair, equitable treatment for its employees.

Let’s dive into how payroll compliance works, some of the common laws that impact it and what organizations should do to strengthen their regulatory processes.

What is payroll compliance?

Payroll compliance is how businesses adhere to laws and rules that relate to payroll and payroll taxes. Legitimate organizations need to comply with legislation on the local, state and federal levels to sustain their operations.

Consequences for failing to comply exist at every level. But regardless of a penalty’s severity, companies that prioritize payroll compliance protect the HR process that matters most to their people.

Who is responsible for maintaining payroll compliance?

While broad compliance falls on everyone in an organization, HR and accounting are generally responsible for payroll. These departments should understand how payroll compliance works, but they should also rely on software, such as self-building payroll tech, to automate the process.

Ultimately, an employer is liable if payroll compliance fails. If a company is uncertain about its compliance, it should always consult a licensed legal professional.

Laws and regulations affecting payroll compliance in 2024

Multiple factors influence payroll compliance. Businesses should keep these common laws, rules and guidance in mind as they build, adapt and tighten their strategies.

Fair Labor Standards Act (FLSA)

FLSA sets the following for employees working in the private sector or for local, state or federal governments:

• minimum wage
• overtime pay
• record-keeping
• youth employment standards

While some exemptions exist, most employers must adhere to FLSA.

Minimum wage

A minimum wage is the lowest hourly rate businesses must pay employees. Currently, the federal minimum wage is $7.25 per hour. Keep in mind a state’s minimum wage may override this, so it’s important for companies to comply with the exact requirements of the jurisdictions where they operate.

Overtime pay

Overtime pay refers to a higher rate employers must pay hourly employees for working beyond normal working hours. Generally, “normal working hours” refers to anything over 40 hours a week.

For example, most hourly employees earn no less than their time and one half (or 1.5 multiplied by their hourly rate) for overtime.

IRS guidelines

The IRS enforces several payroll taxes, including:

• the federal income tax
• Social Security
• Medicare taxes

While employers are required to withhold these taxes for their workforce, they are determined by what an employee earns and the data provided on their Form W-4.

State income tax laws

In addition to federal taxes, each state — and even certain cities — maintains its own payroll tax laws. Since exact guidance varies between locations, businesses should verify the exact rate with the relevant local agencies.

State Unemployment Tax Act (SUTA)

SUTA — also known as “state unemployment insurance” (SUI) — is a required payroll tax that’s placed into a state’s unemployment fund to pay benefits to employees who separated from their companies.

Read our blog post to verify the current SUTA tax rates in the state(s) where your business operates.

Family and Medical Leave Act (FMLA)

FMLA allows certain employees to take unpaid, job-protected leave for family and medical reasons. While “unpaid” may make some assume it has little to do with payroll, that’s not the case.

FMLA allows affected workers to still receive their group health insurance benefit as if they had not taken leave. Plus, employees who use FMLA also have the same right to:

• conditional pay increases
• bonuses
• other payments

For this reason, businesses should ensure they don’t omit employees who use FMLA leave from payroll entirely.

Equal Pay Act

The Equal Pay Act of 1963 prohibits pay disparities based on sex. In other words, the law ensures all employees in the same organization earn equal pay for equal work.

While the Equal Pay Act doesn’t require a specific tax or deduction, it does enforce fair and equitable payroll practices. As such, it’s crucial for businesses to address bias and discrimination before it leads to noncompliance.

What employee classifications should businesses know for payroll compliance?

When it comes to payroll compliance, it’s not enough to understand the bare minimum of a law. Employers should also identify which employees a tax or rule affects. Keep the following IRS documents and statuses in mind.

I-9 vs. W-2

The Form I-9 is used to confirm the identity of an employee who completes a Form W-2. While the I-9 doesn’t influence taxes, the W-2 reflects how much an employee earned in a year, as well as the:

• amount of taxes withheld from their checks
• benefits they received
• other relevant info

Exempt

Exempt employees are individuals who aren’t required to pay certain taxes. Tax exemptions could apply to employees who don’t meet a certain income threshold or those who work for exempt organizations like:

• federal, state or local governments
• recognized religious institutions
• certain charities and nonprofits
• and more

Non-exempt

Non-exempt employees, as the status implies, still have to pay taxes as required by applicable laws. While most people fall into this category, employers should never assume their entire workforce isn’t exempt.

Another way of defining non-exempt employees is those who do qualify for the federal minimum wage and overtime pay. Remember, employers should always consult a licensed professional if it’s not clear who among their employees may be exempt from certain taxes.

What are the deductions in payroll compliance?

Most laws that impact payroll compliance will come paired with a specific deduction. Consider these common examples.

Benefits

Due to laws like COBRA, HIPPA and more, organizations should carefully maintain, audit and even automate their benefits administration. Additionally, Affordable Care Act (ACA) requires employers to offer health care coverage after hitting a certain head count.

While these laws don’t establish a universal benefits deduction, businesses must still adhere to them to ensure payroll compliance.

Garnishments

Not every deduction is set by a widespread law. A garnishment is the process in which an individual’s wages must be withheld by their employer to satisfy a debt or another financial obligation.

Garnishments — even those resulting from judgements against a specific employee — can still result in an employer being held liable for the full amount and citations if not followed.

Payroll taxes

A payroll tax is a portion of an employee’s earnings that are withheld by an employer to fund local, state and federal programs. Businesses that don’t deduct the appropriate amount may face fines, audits or other legal penalties.

What technology should businesses use to ensure payroll compliance?

Payroll compliance may seem complex, true, but the right HR management tools help businesses manage an otherwise taxing manual process. Organizations should consider using tech — ideally available in a truly single software — to their regulatory burden.

Record-keeping requirements

Businesses should always be prepared to prove their compliance with laws like the Equal Pay Act and potential government audits. The best tools make it easier for businesses to:

• conduct self-audits
• identify and address potential noncompliance
• provide any required reports or documentation
• respond accurately and timely to requests

In tandem with document management software, companies should consider an employee self-service experience that seamlessly moves data from one tool to the next. Doing so ensures info is entered once — and only once — to minimize errors and data loss.

Transparency and data protection

When it comes to payroll compliance as it relates to employees, organizations should prioritize two things: security and accessibility. The HR tech a company uses should make it easy for employees to view and manage every component that affects their pay, including taxes, garnishments and other deductions.

At the same time, workforce software should be secure as vetted by a legitimate agency. For example, the best providers should be ISO- and SOC-certified, while also maintaining clear and effective policies around:

• risk mitigation
• infrastructure and access control
• data, product, endpoint, application, network and corporate security

Direct-deposit allocations

Direct deposit is one of the most common and convenient methods for employees to receive their pay. This process deposits a worker’s earnings into one or more valid bank accounts.

To help ensure compliance, businesses should invest in payroll software that simplifies this process by allowing employees to easily manage and modify their direct-deposit info. Likewise, this tech should constantly be capable of paying employees on time and accurately.

What are the risks of noncompliant payroll?

If detrimentally harming an employee’s financial livelihood wasn’t enough, businesses can also endure numerous legal consequences for noncompliant payroll.

Penalties

Employers who neglect their payroll tax obligations or other requirements can wind up on the hook for costly government-administered fines. Consider this: Businesses that are over 15 days late to deposit their IRS payroll taxes may receive a penalty worth 10% of the delinquent taxes.

Litigation risks

Payroll noncompliance can create an opportunity for costly lawsuits and their subsequent settlements or judgements. For example, Alabama steelworkers were awarded $13.2 million dollars in 2022 for a legacy of unpaid overtime.

Payroll compliance: FAQ

Do payroll compliance laws apply to businesses regardless of size?

Most businesses are covered by some law related to payroll compliance. But what applies to them may differ based on their exemption status and company size. For instance, the ACA only applies to organizations that employ 50 or more full-time employees (including the full-time equivalent employees based on the hours they work).

Do all states have unemployment insurance requirements?

Yes, and each one maintains a separate unemployment insurance program. However, not every state requires employers to pay SUTA taxes. Alaska, New Jersey and Pennsylvania administer taxes to employees, too.

What is the risk of miscategorizing an employee as an independent contractor?

Misclassifying an employee as an independent contractor — and thus paying them incorrectly — can result in significant fines and penalties. Read our blog post to learn how a new Department of Labor definition broadens the legal meaning of an employee, impacting the status for millions of people.

How can Paycom help my organization remain compliant?

With our self-building payroll tech and comprehensive government and compliance tools, Paycom simplifies your organization’s compliance challenges — all in a single software.

Beti®, our employee payroll experience, self-starts each pay period, pulling live data on:

• employees’ hours worked
• approved expenses
• compensation changes
• relevant deductions and taxes
• and more

In turn, this makes it easier for HR to bolster compliance and focus on value-adding initiatives. Plus, our Government and Compliance tool monitors legislation that could affect your business to:

• mitigate exposure to noncompliance
• respond to audits with robust reporting
• gain compliance piece of mind

Explore Paycom’s resources to learn more about payroll, compliance and other important HR topics.