Compliance with reporting and record-keeping requirements mandated by federal and state legislation is a must for any employer, partly for the positive reputational benefits and partly to avoid the penalties for non-compliance. Sage’s research brief, Avoiding Costly Fines: A 2011 Guide to Compliance Mandates, states, “Accurate payroll is essential for any company. Mistakes in employee pay calculations can lower employee satisfaction. Errors in government filings and tax payments can result in costly fines.” In fact, compliance is one of the core challenges facing any payroll process. What follows are summaries of the four main payroll-related pieces of U.S. federal legislation (three of which even made it into our top 10 global payroll regulations report).
1) Payroll Compliance and the Federal Insurance Contributions Act (FICA)
Overview: Social Security, disability, and Medicare all come under the FICA umbrella. FICA records must be kept for at least four years after either the tax due date or the date the tax is paid, whichever is later. Wages and taxes are reported quarterly to the IRS and W-2 and W-3 forms are submitted annually to the Social Security Administration (with appropriate W-2 copies also provided to the employee). Taxes are deposited based on employer’s deposit schedule as determined by their look-back period.
Applies to: FICA covers all employers; i.e. any entity that employs one or more employees.
Penalties: Both civil and criminal penalties are possible for failure to meet FICA obligations, including the late filing of employment tax returns, late payment of taxes shown on employment tax return, and federal interest assessed for underpayment of taxes.
2) Payroll Compliance and the Federal Unemployment Tax Act (FUTA)
Overview: Broadly speaking, each state regulates and administers its state unemployment program independently and so covered wages, tax rates, and workers’ benefits vary from state to state. Like FICA, FUTA records must be kept for at least four years after either the tax due date or the date the tax is paid, whichever is later. Unemployment wages and taxes are reported annually to the IRS. Taxes are deposited quarterly or annually based on the tax amount.
Applies to: Employers with one or more employees, working at least some portion of a day in each of 20 weeks or pay wages of $1500 or more during any quarter. (Different tests apply to agricultural and domestic worker employers.)
Penalties: Both civil and criminal penalties are possible for failure to meet FUTA obligations, including the late filing of employment tax returns, late payment of taxes shown on employment tax return, and federal interest assessed for underpayment of taxes.
3) Payroll Compliance and the Fair Labor Standards Act (FLSA)
Overview: This legislation sets out regulations covering minimum wage, overtime pay, equal pay and child labor. Employers must maintain records of employment and earnings; order, shipping, and billing records; additions or deductions from wages; certificates of ages; wage rate tables; and work time schedules for two years. In addition, records must be kept showing an employee’s name, address, gender, and birth date; occupation and daily work schedule; individual contracts and bargaining agreements; sales and purchase records; regular hourly rate of pay for any week in which non-exempt person worked overtime; record of hours worked on a daily and weekly basis with total earnings due for non-exempt employees; and actual wages paid and deductions taken for three years.
Requirement: Enterprises with two or more covered employees and gross $500,000 per year in sales must consider all employees covered. Any enterprises that were covered by the law as of March 31, 1990, but do not meet the annual sales figure continue to be subject to the overtime pay, child labor, and record-keeping provisions. The following enterprises are covered without regard to volume of sales: hospitals and related institutions and schools, profit or non-profit; public agencies.
Penalties: Either an employee or the Secretary of Labor can file a court action against an employer for unpaid minimum wage, unpaid overtime compensation, or liquidated damages. The statute of limitations on enforcement is two years for non-willful action and three years for willful action. Civil penalties of up to $50,000 can be assessed and/or imprisonment up to six months upon a second conviction. Injunctive and monetary relief for back pay and/or overtime may be assessed. Damage awards may be doubled when violations are willful.
4) Payroll Compliance and the Consumer Credit Protection Act (CCPA)
Overview: Protecting consumers from unfair or harsh collection practices, the CCPA also specifically protects employees by restricting the amount of earnings that can be attached for the payment of creditor debts, alimony, child support, and federal debts. There is no separate reporting requirement. However, records must be maintained which show garnishment of individual wages did not exceed 25% of the individual’s weekly earnings or the amount by which his weekly earnings exceed 30 times the federal minimum hourly wages prescribed in the FLSA, whichever is less. Exceptions to this rule exist for child support and debt due for any state or federal tax.
Requirement: All employers, regardless of size.
Penalties: In states where an exemption for state-regulated garnishments has been granted, the state enforces the limitations on garnishment amounts. However, the restrictions on discharge from employment may be enforced by criminal prosecution leading to a fine or imprisonment.
Payroll Compliance Bottom Line
These four federal statutes are the major pieces of legislation in relation to payroll, but even so they constitute only the tip of the iceberg (e.g. Sarbanes-Oxley compliance for payroll is huge) as far as employers’ compliance requirements are concerned—particularly when state legislation is included. One additional thing that employers should take note of though, is that even if it is a non-negotiable legal requirement to comply with these mandates, an organization’s reputation with its employees (both current and future) and within its industry sector can be boosted by a solid compliance record.