What are Your Legal Obligations Related to Payroll Administration?

For any business that hires employees, it’s important to understand the legal obligations related to processing payroll. Typically, an employer is free to set up its own system of payroll administration and can choose the frequency of pay as well as the day of the week that is the designated pay day. However, there are limits to what an employer can do and what must be done to stay in legal compliance. (Bear in mind that exactly how often employees must be paid and in what format may also be regulated at the state or local level.)

Legal Obligations Related to Payroll Administration: Some Tips

 Here are some tips for ensuring you meet your legal obligations related to payroll administration:

• First, an employer must have an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) in order to hire employees. This is also known as the employer tax identification (ID). The EIN aids in reporting taxes and other information to the IRS and to state and local agencies. You may also be required to have state or local ID numbers, so be sure to check.
• Employers must perform income tax withholding and payment on behalf of the employee for both federal and state income taxes. Use the employee’s W-4 information (completed upon hiring) to ensure that you’re withholding the proper amounts.
• Employers are also responsible for the prompt payment of the employer portion of income taxes, including the employer portion of Social Security and Medicare taxes.
• Wage garnishments must be processed when requested. As such, employers should understand the limits of what and how much can be garnished from an employee’s paycheck. Employers should also understand how to administer this.
• Employers also have an obligation to maintain accurate payroll records in terms of hours worked, pay, deductions, etc.
• Completion and distribution of W-2 forms for employees are required annually in January. Employers must also complete 1099 forms for contractors. These forms are the employee or contractor record of the prior year’s income.
• There are also state and local regulations in terms of the timing and inclusions in the employee’s final paycheck as well as what can and cannot be deducted. Penalties apply for not adhering to these regulations. Be sure to check local laws to ensure you’re up to date on these requirements for all geographic areas of operation.
• Employers must understand what can and what cannot be deducted from employee wages in general. This answer may vary depending on the employee pay level. For example, an employee who is paid minimum wage may have fewer allowed deductions—even for items that would otherwise be legally allowed—than an employee who is paid above minimum wage.
• For all employees, the employer will have reporting requirements. Payroll information along with taxation information must be accurately recorded and submitted to the IRS.
• Employers must also report new hires to state agencies to assist in the administration of government programs and to ensure that benefit payments are stopping and starting as intended. (For example, this assists in getting child support payments set up and in ensuring that welfare and other benefit programs are received by those who need it and are stopped for those who no longer meet the income thresholds.)
• Overtime pay must be calculated and paid correctly and within legal guidelines.

With all of these considerations, many employers opt to utilize third-party services that specialize in ensuring that all payroll regulations are met. That said, using a third party does not relieve an employer from all obligations in this regard.

Does your organization use a third-party service, or is this a task kept in house?

*This article does not constitute legal advice. Always consult legal counsel with specific questions.
 

About Bridget Miller:

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.