How to ensure payroll compliance

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

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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

Lano Resources

Get an extended Payroll Compliance Checklist as PDF

Download the Checklist