There’s a lot that goes into your payroll, and no business is exactly the same. However, there are some things all companies should be doing when processing payroll and outlining their best practices and policies. Check out our blog on Payroll 101 to make sure you are checking all of the boxes and staying compliant.
Payroll 101 Overview
Federal and state wage and hour laws regulate the method of payment of wages, allowable deductions, the withholding and payment of employment taxes, wage garnishments, record keeping, and the maintenance of payroll records. Employers must withhold from employee paychecks certain tax payments, including income taxes and the Federal Insurance Contributions Act (FICA). To determine the proper withholding for federal and state income taxes, employees must complete a W-4 and provide their Social Security number (SSN). At the end of each year, employers must report on a Form W-2 each employee’s earnings and withheld taxes. Employers must also have an employer identification number (EIN) for reporting and paying unemployment and payroll taxes. Employers must also report new hire information to a state directory as part of federal legislation on welfare reform.
FLSA & Payroll
The Fair Labor Standards Act (FLSA) or the Wage and Hour Law. The act regulates minimum wage, overtime, equal pay, record keeping, and child labor. It has implications to payroll, such as paychecks, withholding allowances, taxes, payment practices, and record keeping. This section gives a general description of these issues. Employers should seek professional advice on complicated matters.
Paychecks
There is no federal law that sets out how often or in what form employers must pay wages to employees. However, most states address these issues.
Timing of paydays. Virtually all states regulate how frequently employers must pay employees their wages. State laws also specify the length of time that may elapse between the end of the pay period and payday. Some states require employers to notify their employees in advance of regularly scheduled paydays.
Also, some state laws specify when to pay employees who are absent on payday and when the regular payday falls on a holiday.
Payment upon termination. Most states also specify when employers must pay employees who leave the company. The statutes often distinguish between voluntary and involuntary termination. Under the most common provision, employees who are fired or laid off must be paid just after termination; employees who resign must wait until the next regular payday. However, some state laws favor employees who give their employers sufficient advance notice of their intention to resign. By providing such advanced notice, the employee is entitled to pay on their final workday.
Some states require that, in addition to wages, employers pay terminating employees for accrued vacation time.
Withholding Allowances
Form W-4. The amount of federal income tax withheld is based on withholding tables published by the Internal Revenue Service (IRS) and the information provided on each employee’s Form W-4, Employee’s Withholding Allowance Certificate. Each new employee should fill out a W-4 when hired. Suppose a new employee does not provide a completed W-4. In that case, tax is withheld as if he or she is single, with no withholding allowances. A W-4 remains in effect until the employee provides a new one. Revised withholding must begin no later than the first payroll period ending on or after the 30th day after the revised W-4 was received. Employers may establish systems that let employees change their W-4 information electronically.
Employers are no longer required to submit an employee’s W-4 to the IRS routinely:
- the employee claims more than ten withholding allowances
- or claims an exemption from withholding and would generally earn more than $200 per week.
However, in certain circumstances, the IRS may direct an employer to submit copies of a W-4 for certain employees to ensure adequate withholding. Employers are now required to submit the W-4 to the IRS only if directed to do so in a written notice or under specified criteria outlined in future published guidance.
Suppose the IRS determines that an employee does not have enough withholding. In that case, it will notify the employer to increase the amount of withholding tax by issuing a “lock-in” letter. The letter specifies the maximum number of withholding allowances for the employee.
Warning. Employers that do not follow the IRS lock-in instructions will be liable for paying the additional amount of tax that should have been withheld.
Invalid W-4. If an employee files a W-4 and indicates the number of exemptions shown on the W-4 is false, the W-4 is invalid. In this circumstance, an employer may request a new W-4 with valid information. If one is not provided, the employer should continue to use the previous W-4. If there is no previous W-4, withholding should be at the rate for a single person with no exemptions.
W-4 revisions. There is no limit to the number of times an employee may change the number of withholding exemptions that employees claim by filing a new W-4 form. Employers should not charge a fee for processing revised W-4s. A revised exemption does not have to take effect until the first payroll period ending after the 30th day after the new form is filed. Employees may have to wait 3 to 4 weeks after they file a change for it to take effect.
Garnishments
What is a wage garnishment? A wage garnishment is an order from a judicial or governmental agency requiring an employer to withhold a certain sum from an employee’s wages for payment of a debt. Such an order may come from the IRS, a federal or state agency or court, or an individual creditor. An employer’s response to a garnishment demand will depend upon its nature and in what order the employer receives it. Wage garnishments are enforceable in all 50 states, Puerto Rico, the District of Columbia, and all U.S. territories and possessions.
Wage garnishments are very complex. Federal law is not straightforward, and state laws also interact with garnishment obligations. An employer that receives a wage garnishment order may want to consult a legal adviser before deciding how much to withhold and, in the case of multiple garnishments, where priorities lie.
Never ignore a garnishment order. Failure to answer and comply may result in a contempt of court judgment. In some cases, the employer may wind up with liability for the amount owed. In the case of a consumer order, if an employer is unable to honor it because of its priority or the exemption amount, the employer must communicate with the court or agency and explain the circumstances.
New Hire Reporting
As part of the comprehensive welfare reform legislation known as the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996, every state must operate a child support enforcement program. Under the PRWORA provision (42 USC 653a), employers must report each newly hired worker to a state “directory of new hires” within 20 days of hiring by submitting the employee’s W-4 form or equivalent document containing the worker’s name, address, and SSN. States have the option of establishing reporting time frames that are shorter than 20 days. Private employers must adhere to the reporting time frame of the state to which they report. The state agency, in turn, must report this information to a “national directory of new hires” at the U.S. Department of Health and Human Services. Multistate employers can designate one state registry for filing all new hire reports.
Payroll 101 – Payment Practices
Direct deposit. Many states allow employers to use direct deposit or debit cards to pay wages and salaries. Employers who pay their employees by depositing funds directly into the employees’ bank accounts or with a debit card should keep their written authorizations on file.
Giving a paycheck to another individual. Employees who are absent on payday will sometimes ask a friend or relative to pick up their paychecks for them. Although there is no specific legal prohibition against this practice, the law requires the employer to pay the employee. If the relative or friend steals the check, the employer must still pay the employee. Employers that engage in this practice should be sure to get identification and a signed receipt.
Check cashing. Some state laws suggest that employers must provide employees with a check-cashing service or that paychecks must be drawn from a convenient bank.
Although they are under no statutory obligation to do so, some employers grant employees paid time off so that they may cash their paychecks. This practice was developed before the advent of automatic teller machines, and electronic funds transfers when it was difficult for employees to cash their checks.
Record Keeping
Both federal and state law regulate payroll record keeping. Many states require employers to notify employees of all earnings and deductions for each pay period. The federal FLSA requires that employers keep certain information on file for each person on the payroll.
Exempt and nonexempt.
Employers must keep the following information for both exempt and nonexempt personnel:
- Employee’s full name, number, or identifying symbol
- Home address
- Date of birth – if the employee is under the age of 19
- Sex and occupation in which employed
- Time and day of the week on which workweek begins
- Total wages paid each pay period
- Date of payment and the pay period covered by the payment
- Retroactive wage payment under government supervision
Nonexempt only.
Employers must keep the following information for nonexempt personnel only:
- For any week in which overtime pay is due, regular hourly rate of pay, the basis on which wages are paid, and regular rate exclusions
- For any week in which overtime pay is due, regular hourly rate of pay, and regular rate exclusions
- Hours worked each workday and each workweek
- Total daily or weekly straight-time earnings or wages
- The Total premium pay for overtime hours
- Total additions to or deductions from wages paid in each pay period
- Factors other than gender that are the basis for payment of any wage differential to employees of differing sex
Place for Keeping Records and Their Availability for Inspection
Place of records. Employers must keep documents safe and accessible at the place of employment or at a recordkeeping office. When the records are maintained at a recordkeeping office other than in the place of employment, the records must be made available within 72 hours following notice from an administrator.
Inspection of records. All records must be available for inspection and transcription by an administrator (of the DOL) or a duly authorized and designated representative (29 CFR 516.7).
Additional Information:
For additional information, see IRS Publication 15, Circular E, the Employer’s Supplemental Tax Guide, on the Internal Revenue Service’s website at http://www.irs.gov.