Are You Processing Your Payroll Correctly?

There’s no question that everyone loves payday. However, for the person processing those paychecks, it can be a challenge to make sure the company is complying with Fair Labor Standards Act (FLSA), garnishment laws, and IRS tax laws. Here are some guidelines for making sure your company’s in compliance.

The Fair Labor Standards Act requires employers to pay employees on their regularly scheduled paydays.

  • Employers are required to maintain time records for non-exempt employees that includes the time each individual started and ended work for each day.
    • Once the time is recorded for each day in the payroll period, the payroll processor must tally the hours worked and determine if the employee worked overtime in any workweek so that appropriate overtime can be calculated and paid.
  • Although employers are not required to maintain time records for exempt employees, they are required to pay them their guaranteed weekly salary and are limited in what deductions they’re permitted to make from those employees’ pay.
  • In general, the FLSA allows employers to make voluntary deductions for benefits such as health insurance, additional life insurance, short term disability, etc. Deductions for other reasons such as shortages, damages to company property, etc. are limited. The Department of Labor (DOL) explains what those limitations are for non-exempt employees.
  • There are greater restrictions on deductions from exempt employees’ salaries. More guidance can be found in these DOL regulations and the following Opinion Letters: FLSA2005-41, FLSA2005-46, FLSA2006-7 and FLSA2009-14.

Garnishments or income deduction orders are issued by a court or authorized agency and require the employer to withhold monies from an employee’s pay for an unpaid debt or for child support/alimony. Title III of the Consumer Protection Act is administered by the DOL’s Wage & Hour Division and limits the amount of money an employer can take from an employee’s pay. It also prohibits an employer from terminating individuals for a having a single debt. An employer may receive multiple writs of garnishment against an individual. Typically, these garnishments would be withheld based on the order in which they are received. It’s important for employers to process garnishments properly. If they do not, the company could ultimately be responsible for paying the debtor if it didn’t properly withhold the monies from the employee’s pay and submit them in a timely manner as required by the writ of garnishment. Because garnishments can be complicated, it is recommended that the employer consult with an employment law attorney to obtain clarification when they have questions about processing garnishment orders.

Processing payroll taxes begins with an employee’s completion of Form W-4. This form may be completed in paper or in an electronic format permitted by the Internal Revenue Service (IRS). Although not required, it is recommended that the person processing payroll ask to see a copy of the employee’s Social Security Card to confirm the name and numbers reported on Form W-4 match what’s on the card. If the Social Security number doesn’t match, the employee should be instructed to contact the Social Security Administration in order to resolve the issue.

Additionally, paychecks should be issued in the name shown on the Social Security Card. The Social Security Administration (SSA) and IRS look at both the name and number when verifying individual accounts. If a company submits reports that don’t match IRS records, it could result in a mismatch letter being issued as well as subsequent penalties. Frequently, this issue will arise when an employee marries and requests that her paycheck be issued in her new name. In that circumstance, it’s recommended that companies require her to show them a new Social Security card that contains the updated name. If she has not yet updated her name with the SSA, the company should continue to issue paychecks in the name shown on her current card.

The Internal Revenue Service provides employers with guidance on what pay and benefits are considered taxable income in their Publications 15, 15-A and 15-B. These guides answer a myriad of questions including how to calculate income tax on bonuses, under what circumstances employee expense reimbursements may be considered non-taxable, and making educational expenses (tuition reimbursement) non-taxable.

Rules governing the deposit (submission) of payroll taxes have been established. At the beginning of each year, the employer must determine whether it will deposit payroll taxes on a semi-weekly or monthly basis. The frequency is determined by the anticipated amount of the payroll tax liability. See Page 25 of Publication 15 for more details.

Additionally, the company is responsible for submitting quarterly Form 941 reports to the IRS. This form is used to report the Social Security, Medicare and income taxes that have been withheld from employees’ pay during the quarter.

Annually, the employer will compile and submit Form 940 (federal unemployment taxes) and Forms W-3, the employer’s report that is provided to the Social Security Administration that mirrors the information contained on the W-2.

Because technology seems to have become so commonplace, employers often ask if they are allowed to distribute Form W-2 to employees electronically. The IRS does permit this practice. However, there are very specific guidelines that must be followed in order to comply with their rules. Employees must give the company authorization to provide their Form W-2 electronically and they have a right to cancel that authorization and request a paper version of the document. There is a list of specific items that must be communicated to employees in order to comply with the IRS guidelines for electronic distribution of W-2 forms on page 4 of Publication 15-A.

There are additional tax reports that must also be filed, such as corporate income tax returns, special reports if the company is an agricultural employer, etc. The IRS provides a comprehensive list of all employment tax due dates.

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