How To Avoid 6 Common Payroll Compliance Mistakes

Non-compliance with state and federal payroll laws can be costly

Payroll practices are governed by both federal and state regulations and non-compliance can lead to serious penalties. As regulations vary by state, it is vital that HR managers are aware of the regulations that apply to their workforce. In the absence of regulations, managers should ensure that they have implemented their own standardized policies and procedures relating to payroll practices. 
 

Below are six common mistakes made in payroll practices that HR managers should be familiar with.

1. Missing Timesheets

In instances where a non-exempt employee forgets to have their timesheet signed by a manager or fails to complete it in time, employers must continue to pay the worker under Fair Labor Standards Act and request that the employee submit their timesheet as soon as possible.

2. Final Pay

For employees who leave the company before their regular paycheck date, federal law requires that payment is continued to be paid at the next scheduled date, however, this regulation is state-specific. Some states have implemented rules requesting shorter timeframes, such as payment being made within 72 hours after resignation, as is the case in California.

3. Unused Vacation Time

Unless a company has implemented a specific policy to address what happens to the payment of unused vacation time at the time of resignation or termination, companies are typically required to pay back any unused vacation time. This may vary based on whether an employee was terminated or resigned.

4. Payroll Paperwork

Areas that commonly cause difficulties for HR managers are errors in filling out W-2 forms and 1099-MISC forms, missing deadlines for tax deposit and filing, miscalculating state unemployment tax, poor data gathering and record keeping. Fortunately, many software solutions such as SaaS-based applications allow for the automation of many of these processes. 

These tools provide modules that notify HR managers of important tax deadlines, as well as modules that accurately track the number of hours worked, accrued vacation time, overtime calculations and pay-check administration.

5. Employee Misclassification

One of the most common mistakes made by companies is the misclassification of workers as employees or contractors, a mistake that can have serious tax penalties. There are many instances in which companies have purposefully classified workers as independent contractors in order to avoid paying workers compensation, social security, state unemployment insurance, employee benefits, vacation, holiday and sick pay. 

Understanding the level of control a worker has over their workload is one way in which HR departments can determine how workers should be classified. If workers are responsible for setting their own time and hours, determining how their work will be carried out and using their own tools and equipment, it is likely that they are independent contractors.

6. Frequency and Method of Pay

Frequency and method of payment will vary by state and, in some cases, it may vary by industry. The federal law does not provide regulations on the frequency of payment but some states do regulate weekly or biweekly payments. 

Special rules may also apply to government employees. Some states do not require employers to provide their workers with pay stubs, such as Alabama, whereas states such as Connecticut require that all employers provide their workers with pay stubs on each payday. For paydays that fall on public holidays, some states, mandate that payments be made the business day before the holiday. 

For states with no regulations, companies may set their own guidelines and choose to pay their workers either the day before or after the holiday period. In terms of payment method, some states do stipulate that employers cannot mandate their workers to receive payment by direct deposit unless a worker specifically chooses to use direct deposit. 

In states which do not have these regulations, federal law does permit employers to pay via direct deposit with written authorization from their employees. 

Streamline Payroll Management 

The use of a human capital management (HCM) solution can significantly reduce these common mistakes and streamline payroll management. Today, cloud-based payroll solutions enable HR managers to quickly calculate and run payroll with a single click. 

The ideal solution should automate the processing and distribution of checks, vouchers, and W-2s and also provide tax management to help managers handle tax compliance and computations, including multi-state taxing rules and reciprocity. With real-time access to payroll data and tax updates, HR managers can prevent costly penalties associated with non-compliance to state and federal regulations. 

Frank Diassi, Chairman at Unicorn HRO. Connect Frank Diassi