Companies and their human resources teams have many legal obligations to keep track of. One of the largest is tax compliance, especially concerning employee payroll. Businesses need to be aware of all requirements, especially since their ever-changing nature could result in costly penalties for lack of adherence. There are many steps organizations can take to ensure they maintain control of these obligations. Let’s take a look at three:
1. Understand specific state stipulations
Payroll taxes are not a one-size-fits-all practice. Instead, every state has its own requirements companies have to fulfill if they operate there. Employing people who operate in different states means HR teams have their work cut out for them and will have more mandates to keep track of. One of the biggest tax specifications organizations must be familiar with is the unemployment tax rate they are liable for. This differs by state, so HR leaders must remain up to date on any alterations to this code over time to ensure tax filings are accurate, according to the National Federation of Independent Business.
In addition, wage laws differ by state. While the current federal minimum wage is holding at $7.25 per hour, some states offer their workers a higher amount. Businesses operating in places where this is the case must pay their employees the greater wage, according to The Houston Chronicle.
2. Determine taxable employees
Businesses hire a variety of workers, but they often fall into two categories: employees or independent contractors. While salaried employees are required to receive benefits and are covered by company discrimination and harassment laws, independent contractors are not entitled to the same treatment. Furthermore, organizations do not have to withhold taxes for independent contractors, as they are technically self-employed. To differentiate between the two specifications, employers should answer the following questions, according to the U.S. Small Business Administration:
- Does the employee operate under a business name?
- Does the worker have his/her own employees?
- Does the person maintain a separate business checking account?
- Does he/she advertise his/her business’ services?
- Does the worker invoice for work completed?
- Does the person have more than one client?
- Does the employee have his or her own tools and set own hours?
- Does the worker keep business records?
If the answer to these questions is “yes,” then the worker is an independent contractor.
3. Understand withholding obligations
When it comes to managing payroll tax practices, it’s vital for businesses to understand their specific requirements in terms of withholding. Both employers and employees are responsible for certain obligations, including Social Security and Medicare as well as federal, state and local income taxes. Organizations also have to pay for workers’ compensation and unemployment. Failure to comply with these standards could result in civil and criminal sanctions from the IRS, but usually begins with penalties of increasing amounts.
Businesses and their HR and payroll teams must understand the specific requirements their organization must follow. This includes employee classifications, state and federal wage laws, unemployment state obligations and withholding rules. By remaining current with these standards, companies can avoid legal action, expensive fines and loss of employee trust and industry credibility