5 steps to payroll compliance with HRMS
Naturally, the employer’s obligation is to pay the workforce their contracted remuneration, but they also have to give the government its share. At its simplest, this involves withholding a portion of the salary paid and then passing it on to the appropriate government body (federal, state, etc.) according to a designated schedule. There are penalties for failing to comply and there’s no shortage of public accounting firms offering a payroll compliance audit service; to check your books before the IRS (or similar) do it for you.
But payroll compliance goes beyond being the government’s tax collector, there is other legislation that demands employers keep certain records and file particular reports. As well as the Internal Revenue Code that tells you how much income tax to withhold and where to send it, a number of federal statutes lay payroll-related responsibilities on employers and your HRMS is one your key tools for compliance.
Benefits of using HRMS for payroll compliance
First, let’s agree on the compliance advantages of HRMS payroll:
- Accuracy of data: a single HRMS can handle your payroll together with other people processes that use or generate related data, such as time and attendance, leave management, and work scheduling. As this data is usually only input once, an HRMS has a distinct accuracy advantage over either a paper-based or non-integrated digital solutions. Basic compliance may consist of recording and submitting information according to a strict timetable, but much better if that information is also accurate.
- No penalties: it may seem obvious, but the immediate practical benefit of compliance is that the organization isn’t hit with financial penalties or other sanctions. It’s often difficult to prove how HR adds to the bottom line but in this instance, it’s very easy to see it detracting.
- Employee satisfaction: there are few workplace errors that fuel employee dissatisfaction quite like payroll. And payroll accuracy goes beyond just paying the right amount to the employee, it’s equally about making the right deductions and submitting withheld sums to the appropriate government office. Ultimately any mistakes affect the employees: their taxes and social security contributions, their welfare benefits should they need them, and their pensions. Payroll compliance is motivational hygiene factor: get it right and people take it for granted (they don’t even notice) but get it wrong…
The 5 steps to payroll compliance
There are five simple steps to HRMS payroll compliance:
- Research and understand your responsibilities: with such a large range of labor legislation that is constantly being debated and updated in one way or another, it can be difficult to keep track of what an employer’s responsibilities are. This is where an up to date HRMS can take the weight off. With an automated payroll module, deductions are automatically made in line with the latest tax tables, relevant allowances, benefits and so on. The key is ensuring that regular updates with respect to compliance are a part of your license or contract with the HRMS vendor.
- Excellent recordkeeping: compliance depends on data. Not only does that data need to be accurate but it must also be secure. Payroll-related data is some of the most sensitive personal information you hold on your employees (social security numbers, home addresses, banking details… everything an identity thief needs) and you need to ensure that your system guards that data closely. Your vendor contract should include agreements on data storage, location and back up. (Additional tip: when negotiating your vendor contract, a key issue is who is responsible in the event of non-compliance being due to a failure of the system … and what constitutes “a failure of the system”.)
- Integrated business software: this might not be a ‘compulsory’ element of good compliance practice but it is highly recommended. If your payroll system can talk to your benefits management platform which can talk to your time and attendance module and so on (basically, all the required or related information is capable of being shared or accessed as necessary) then the ease and quality of your compliance data reporting will be greatly improved.
- Report when you’re told to: HRMS compliance includes notifications prompting submission of mandatory reports. In other words, when the system nudges you for your payroll and other reporting requirements (W-2, W-3 forms, etc.) do it. After all, you wouldn’t buy an alarm clock and then ignore the ringing, would you?
- Likewise, pay when you’re told to: similarly, your HRMS will tell you when to pay the IRS (or other relevant government bodies, depending on the payment and/or territory you’re operating in). Repeated missed or late payments are potential grounds for penalties or sanctions. Follow the system prompts!
Taking the US as an example, the following are the core items of payroll-related compliance legislation.
- Fair Labor Standards Act (FLSA): the FLSA establishes the federal minimum wage that you must pay (though state laws may set a different figure, in which case the higher of the two is payable) and is managed by the Department of Labor. The legislation also states overtime be paid when an employee works more than 40 hours per week. Most employers (depending on the volume of sales and number of employees) must keep two years’ worth of records covering shipping and billing, additions or deductions from wages, wage rate tables, and work time schedules. A poster stating FLSA requirements must be displayed in every workplace.
- Equal Pay Act (EPA): if the FLSA mandates minimum wages, the Equal Employment Opportunity Commission managed EPA requires parity. Men and women performing substantially similar jobs in the same establishment must be paid the same rate. A relatively recent key amendment is the Lilly Ledbetter Fair Pay Act, 2009 which states that the 180-day statute of limitations for filing an equal pay suit runs from the date of the most recent paycheck (effectively increasing the possibility of a claim).
- Federal Income Tax Withholding: the IRS requires all employers to withhold a mandated percentage of employee wages on behalf of the federal government. A W-2 form must be filed for each employee.
- Federal Insurance Contribution Act (FICA): employers must also deduct and withhold deductions to cover Social Security, disability and Medicare. The latest rates can be found on the IRS website. FICA records must be kept for at least four years after the date the tax is paid. FICA applies to all employers (even those with a single employee) and requires quarterly reports to the IRS and annual submissions to the Social Security Administration.
- Federal Unemployment Tax Act (FUTA): unemployment tax is a payment by employers (not a deduction from employee wages) to the IRS to fund federal unemployment programs. Most US states have a state unemployment tax as well. Annual reports must be made, covering employee wages and taxes. As with FICA, accurate records must be available for at least four years.
- Consumer Credit Protection Act (CCPA): managed by the Department of Labor, this act requires employers to garnish a proportion of wages (i.e. withhold) when an employee owes a debt following a court order or other legal procedure.
- Affordable Care Act (ACA): employers with more than 50 employees must offer their workforce an option for ‘minimum essential coverage’ health insurance a part of their benefits package, including possibly making a shared responsibility payment to the IRS.
Other payroll compliance issues
Looking at what employers must do in order to comply with relevant government legislation, there a few common pitfalls:
- Poor time and attendance records: as should be obvious by now, complete and accurate records are the way to go. An HRMS can help reduce the likelihood of errors and over- or underpayment of salaries.
- Managing overtime: the different rates for hours worked over and above an employee’s contract are often determined by legislation (e.g. in the US, the FLSA), making it a compliance issue. Human error in salary calculation can be avoided by using an appropriate HRMS.
- Multi-country (or state) payroll: if you employ people in different countries or states, they are likely to be subject to different employment legislation and labor law; including minimum wage rates, tax withholding requirements, and so on. One option is to have separate software for each country’s payroll. Another is to use a global payroll system that is designed to deal with such complications.
- Classification of employees: before you even get to a new hire’s first salary check, there is the potential for error in their classification. Are they legally an “employee” or they an independent contractor, temporary employee, or freelancer. All are treated differently for purposes of benefits, tax withholding, etc. and have different compliance reporting requirements.
To sum up, payroll compliance is a fundamental employer responsibility. Acting in accordance with statutory mandates, such as the above examples, is the only way to avoid a fine or worse – after all, some legislation carries criminal penalties as well as civil. An automated, accurate system of record is a sensible investment.
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