Payroll Compliance Checklist

Payroll and compliance are two of the main considerations for businesses that are hiring and expanding globally. Non-compliance is always a big risk, but with all the different regulations that apply to payroll, the stakes are especially high.

Throughout the different stages of payroll processing, organizations need to avoid various compliance pitfalls. They range from ensuring payroll tax compliance to making sure all the reporting is accurate and submitted on time. And with a global payroll, things become even more complicated.

In order to equip you with the necessary knowledge to safely handle payroll and compliance for your entire global team, we have created a detailed payroll compliance checklist that summarizes the different compliance challenges along with the necessary action items that relate to the different payroll stages.

Payroll is highly regulated. The applicable regulations encompass different legal areas, from employment laws to compensation rules to tax regulations and reporting obligations. Ensuring payroll compliance means adhering to all the different rules that apply to payroll in the respective jurisdiction. 

With a multi-country payroll, the complexities of payroll compliance multiply since different obligations and requirements have to be met in every single payroll country—often taking into account various local, state, and federal regulations.

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Before any payroll processing can take place, you first have to “prepare the ground”, so to speak. Establishing a compliant payroll set-up in every location is therefore the first step on your way to global payroll compliance.

Proper payroll set-up

In order to process payroll, you first need a compliant set-up. There are several ways for running payroll in different jurisdictions. Businesses with multi-country payroll operations can either establish their own legal entities in each geography and set up a proper local payroll, register as a Foreign Employer and run a non-residential payroll, use an Employer of Record (EOR), or set up a shadow payroll for short-term employee assignments.

Registration with local authorities

Every time an organization sets up payroll in a new location, it needs to register with the local authorities in order to get all the necessary identification numbers and be able to do the mandatory reporting etc. The authorities businesses need to register with typically include tax authorities, social security bodies, and other government agencies. In many cases, it’s also necessary to register new hires (and deregister leavers, too).

Payment infrastructure

Paying international employees is a challenge on its own. There are many rules and regulations to abide by, and different countries have different rules regarding whether or not businesses need an in-country bank account to pay local employees. Then there are regulations regarding which currency to use for paying wages and salaries. When paying employee salaries in currencies other than the local one, businesses further need to keep an eye on foreign exchange control.

Pay schedule

In addition to creating a compliant payment infrastructure, businesses also have to make sure their pay schedule meets the legal requirements. This refers both to the pay period, which can be monthly, semi-monthly, bi-weekly or weekly, and the specific pay day. Many countries have rules in place that determine how often employees need to be paid and by what day of the month funds need to be made available to employees.

Compensation laws

Before they can start processing payroll in a new location, organizations must first set the wages and salaries for their workers. Other than considerations regarding the competitiveness of the salary packages, the offered compensation first and foremost needs to be in line with local laws. This includes minimum wage regulations, collective bargaining agreements, special regulations for certain industries and professions and equal pay legislation. 

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Statutory benefits 

Employee benefits are an important part of the overall compensation package, but more than anything, statutory benefits represent an important payroll compliance aspect. Not offering employees all the benefits they are legally entitled to will result in hefty fines. This includes contributions to the mandatory social security schemes, the provision of additional insurance coverage as required by law, and respecting the statutory leave requirements as outlined in the respective labor code.

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Employee classification

Classifying employees correctly is a crucial part of payroll compliance, since employee misclassification will lead to not paying payroll taxes when really they should be paid. Workers can be classified either as independent contractors or full-time employees. But since the guidelines as to what sets the two statuses apart differ from one country to the next, it’s essential to have a country-specific checklist at hand and carefully examine each worker’s classification status.

Data protection

Payroll data contains a lot of personal information and is therefore classified as highly sensitive. In order to prevent data breaches, organizations must set up a secure (ideally cloud-based) payroll system that uses encryption to protect data during transfers and storage. Another important part of payroll security is to restrict system access to a handful of trusted employees. Abiding to applicable data security and protection frameworks such as GDPR is an equally crucial item on your payroll compliance checklist.

Integration with other HR systems

Payroll integration may not be directly related to compliance, but it is an important stepping stone on the way to global payroll compliance. Integrating your payroll and HR software will ensure the accuracy and completeness of the data you need for payroll. Plus, the integrated time tracking function is needed for collecting data on employee working hours and absences. The important thing to keep in mind, though, is to create a secure integration environment to make sure data transfers between systems are secure.

Payroll compliance doesn’t end with setting everything up properly. Instead, it’s an ongoing process that is repeated with every payroll run.

Labor regulations

The record of each employee’s hours worked will tell you whether or not the workload is within legal limits. Most countries regulate how many hours employees are allowed to work within one week, how many hours of rest they need to have, and how much overtime work is permitted. The collected payroll data should be used to verify if all regulations are met.

Payroll tax withholding and filing

Calculating, withholding and submitting the correct amount of payroll tax is a major item on any payroll compliance checklist. In order to maintain a compliant payroll, businesses must calculate payroll taxes based on the latest tax rates, respect applicable thresholds and remit the withheld amounts to the respective authorities on time. It’s also important to use the correct currency and adhere to any regulations that exist with regard to the requested payment method (e. g. whether or not it is required to pay from an in-country bank account that is in the business’s name).

Special taxation rules and requirements

Income tax and social security contributions are the two main types of payroll taxes that play a role in ensuring global payroll tax compliance. But there are almost always some exceptions or special rules that apply to certain compensation elements such as fringe benefits. Plus, most countries have certain allowances and tax credits that need to be considered.

Payslip distribution

Providing payslips to employees is mandatory in most countries. There are several aspects that need to be taken into account to make sure payslips are compliant. First of all, the need to contain all the legally required information. Second, they either need to be digital or on paper, depending on the country-specific rules. Third, they need to be distributed in a way that ensures the information remains confidential.

Accurate and timely payment

After the actual payroll processing, organizations need to make sure that the payment goes through correctly. During the payroll process, the amount to be paid must be verified and the correct currency chosen. Last but not least, the payment must be issued with enough lead time to guarantee the money hits the employee’s bank account on pay day.

It would be wrong to think that payroll ends the moment employees receive their salaries. Payroll activities continue way beyond the actual payroll processing stage, and so does payroll compliance.

Payroll reporting

Income tax and social security payments usually need to be accompanied by matching payroll reports. The latter need to meet two essential criteria; they need to be accurate and timely. On top, businesses often have to file quarterly or annual reports and fulfill additional statutory reporting requirements, gender pay gap reporting being one of them. Meeting the deadlines when submitting these reports is crucial to avoid fines.

Payroll recordkeeping

Organizations are required to keep detailed records of all their payroll activities and anything else related to payroll. There are two important aspects to keep in mind when it comes to payroll records. For one thing, the payroll documentation needs to be complete and contain all the required documents. And for another thing, payroll records must be kept at least for the minimum duration required by law. What might sound like a pretty straightforward process can quickly become quite a challenge when different authorities have different rules regarding how long certain payroll records must be kept. Payroll records should be stored using a secure digital solution.

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Tax and legal changes

Labor laws and taxation rules are constantly changing. Businesses that want to make sure their global payroll remains compliant need to keep track of legal changes in all their payroll countries. This requires efficient mechanisms that continuously check for legal updates. In a second step, the changes need to be implemented in the payroll system.

Employee classification review

New joiners need to be properly classified in the beginning in order to determine for which workers the business needs to withhold payroll tax. However, since the status of a worker can change over time, organizations need to conduct regular reviews to reevaluate the classification of their workers. This is best done with an employee classification checklist. The information then needs to be updated in the payroll system. 

Preparation for potential audits

Compliance audits in payroll happen more often than you might think. Since there is a lot at stake at these audits, businesses should make sure to be well prepared. This means verifying that all the documents and paperwork is in order after each payroll run. It is also helpful to know what audits could be conducted and what the different steps are.

Download the complete global payroll compliance checklist.

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