Payroll is the great equalizer in business. It doesn’t matter whether you employ one person or 10,000 – the regulations and rules governing payroll are the same. Small business owners who don’t have a payroll expert on staff can easily run afoul of state and federal regulators. Here’s what you might not know.
First, state laws trump federal laws, so there are 50 sets of regulations that can vary widely. If you have employees that work in different states, you’re required to comply with that state’s regulations, even if your company is headquartered where you are. If an employee performs work in another state, you’ll need to understand the payroll and tax implications for that location. You may have federal, state, county, and municipal withholding and compliance obligations in some states.
And some states are very complex; Pennsylvania, New York, and California (not surprisingly) have some of the most complex payroll regulations. Here’s just one example: in 49 states, you’re required to pay overtime only if a worker has worked over 40 hours in a given week. In California, you’re required to pay overtime if they work over 8 hours on any given day. It can get complicated fast, and the penalties for getting it wrong are steep.
You may be thinking it will be easier if you make every employee salaried. That takes care of timekeeping and overtime problems- right? Sorry, wrong. Many business owners don’t understand the policies governing who can be classified as salaried (exempt from overtime rules) and non-exempt employees. But a fancy title doesn’t exempt a worker from being paid an hourly rate. The rules are clear that unless someone is a manager or supervisor, they are probably entitled to hourly pay and overtime.
That means that your timekeeping system is a vital part of your compliance. Whether you use paper cards or an online system, you’re obligated to track every employee’s time, both exempt and non-exempt. You’ll need to have records proving that you’re tracking and paying overtime properly – and you’ll need to keep them for at least seven years in case you’re audited.
If you have workers performing hazardous duty, you’ll also need to track the location and kind of work they’re doing, since the worker’s compensation rate you pay will differ based on their activity. Tracking, hour by hour, their activity and location is hard and tedious work, but it’s the only way you can be sure you’re covered if something happens on the job or if the state performs an audit.
Paying payroll tax is the most important part of the payroll process; the penalties for getting it wrong are severe – even more severe than failing to pay your corporate income tax. That’s because you have a fiduciary duty to pay those taxes. You have withheld them from employees, so not paying them after you’ve withheld them is more than simply breaking the rules. It’s like stealing from them.
The problem is that most small business owners don’t know what they don’t know. You have quarterly and annual deadlines for paying taxes, issuing W2s and 1099s. You have collection and recordkeeping obligations for proving eligibility to work in the U.S. and retaining the I-9 forms.
If you don’t get all this right, you’ll face large fines and penalties. If you don’t fix problems once you’ve been notified, the state authorities have the right to shut down your business. They can sell off your assets to pay the back taxes owed. It’s that serious.
That’s why we recommend that business owners hire a professional if they’re doing payroll in-house. Payroll technology companies can be helpful, but they may not have the ability to provide support when you have a question. And most likely, they’re not liable for any mistakes or errors of assumption you made when you set up your system.
We support businesses of all sizes, and we have decades of experience in payroll and other financial functions. We know that what you don’t know can hurt you. It’s our job to get it right and keep our clients on the right side of payroll compliance law.
About The Contributor:
Andrea Bone is the Founder & CEO of Accounting & Business Partners. As a hands-on controller for multiple businesses of various sizes from 1995 to 2022, she has been responsible for all the “back office” operations. Her firm manages accounting, payroll, human resources, taxes, banking, insurance, and legal work. Her favorite part of working with business owner clients is seeing them achieve their goals.
Andrea holds a Bachelor of Science in Accounting from the University of Texas at Dallas and a Master’s degree in Business from Texas A&M University Corpus Christi. She is a Certified Public Accountant and has over 25 years of experience running businesses as a financial controller and CFO.