Running a small business involves juggling many responsibilities, and payroll compliance is one area that requires careful attention. Failure to comply with payroll regulations can result in hefty fines and legal issues. This comprehensive checklist will help you navigate the complexities of payroll compliance, ensuring your business stays on the right side of the law.
1. Obtain an Employer Identification Number (EIN)
Before hiring employees and processing payroll, you need an Employer Identification Number (EIN) from the IRS. This unique identifier is essential for reporting taxes and other documents.
Action Step: Apply for an EIN online through the IRS website.
2. Classify Workers Correctly
Properly classifying your workers as employees or independent contractors is crucial. Misclassification can lead to penalties and back taxes.
Action Step: Review the IRS guidelines on worker classification to ensure accuracy.
3. Collect Required Employee Information
Gather all necessary employee documentation, including:
- Form W-4 (Employee’s Withholding Certificate)
- Form I-9 (Employment Eligibility Verification)
- State withholding allowance certificates (if applicable)
Action Step: Provide new hires with the appropriate forms and verify they are completed correctly.
4. Set Up a Payroll System
Decide how you’ll process payroll—manually, with payroll software, or by outsourcing to a payroll service provider.
Action Step: Evaluate options and choose a system that fits your business needs and budget.
5. Understand Federal and State Tax Obligations
You’re responsible for withholding and paying various taxes:
- Federal income tax
- Social Security and Medicare taxes (FICA)
- Federal Unemployment Tax Act (FUTA) taxes
- State and local taxes (as applicable)
Action Step: Familiarize yourself with tax rates and deposit schedules. Consult the IRS Publication 15 for detailed information.
6. Register for State and Local Tax Accounts
If your state requires it, register for:
- State unemployment insurance (SUI)
- State income tax withholding
- Local taxes
Action Step: Visit your state’s Department of Revenue or Labor website for registration details.
7. Maintain Accurate Payroll Records
Keep detailed payroll records for at least four years, including:
- Employee information
- Hours worked
- Wages paid
- Tax withholdings
- Tax deposits and filings
Action Step: Implement a secure record-keeping system to organize payroll documents.
8. Adhere to Wage and Hour Laws
Comply with the Fair Labor Standards Act (FLSA) regarding minimum wage, overtime pay, and recordkeeping.
Action Step: Ensure you’re paying at least the federal or state minimum wage and correctly calculating overtime for eligible employees.
9. Comply with New Hire Reporting
Report all new hires to your state’s new hire reporting agency within the required time frame.
Action Step: Check your state’s reporting requirements and submit reports promptly.
10. Manage Payroll Taxes and Deposits
Deposit federal payroll taxes according to the IRS schedule, either semi-weekly or monthly, based on your tax liability.
Action Step: Use the Electronic Federal Tax Payment System (EFTPS) to make timely tax deposits.
11. File Payroll Tax Returns
File all required federal, state, and local payroll tax returns, such as:
- Quarterly Form 941 (Employer’s Quarterly Federal Tax Return)
- Annual Form 940 (Employer’s Annual Federal Unemployment Tax Return)
- State unemployment and withholding returns
Action Step: Mark filing deadlines on your calendar to avoid late penalties.
12. Provide Annual Wage Statements
At year-end, provide employees with Form W-2 and independent contractors with Form 1099-NEC if applicable.
Action Step: Distribute forms by January 31 and file copies with the IRS and SSA as required.
13. Stay Informed on Compliance Updates
Payroll laws can change. Keep updated on federal and state regulations that may affect your payroll processes.
Action Step: Subscribe to IRS updates and consult with a payroll professional regularly.
14. Implement Employee Benefits Correctly
If offering benefits like health insurance or retirement plans, ensure they’re administered in compliance with relevant laws.
Action Step: Understand regulations like the Affordable Care Act (ACA) and Employee Retirement Income Security Act (ERISA).
15. Handle Wage Garnishments Properly
If notified, you must withhold a portion of an employee’s wages for debts like child support or tax levies.
Action Step: Follow the instructions in the garnishment order and comply with federal and state laws.
Conclusion
Payroll compliance is a critical aspect of running a small business. By following this checklist, you can help ensure your payroll processes are accurate, timely, and compliant with all legal requirements. Taking proactive steps now can save you from potential headaches and financial penalties down the road.
Need Help with Payroll Compliance?
At Valor Payroll Solutions, we specialize in helping small businesses navigate payroll regulations with ease. Contact us today to learn how we can support your business.
Stay compliant and focus on growing your business—let us handle the complexities of payroll for you.
