Identify Important Payroll procedures and Pay Cycles
- EIN = employer documentation needed before any employees are hired
- FLSA = requires certain info in every employee file
- US DOL = requires the following to be included in employee files
- Full name as shown on the SSN card
- Full address, with zip code
- DOB if younger than 19
- Sex and occupation type
- Employee's workweek = time and day that the workweek begins
- Hours = worked each day & worked each workweek
- Employee's wages = basis on how they are paid
- Hourly pay rate = regular rate
- Straight-time earnings = total daily/weekly
- Overtime = total workweek earnings
- Additions & deductions = all taken or added to employee's wages
- Pay period = total wages paid
- Date of payment
- Pay period covered by the payment
There is a wide range of questions that a company needs to ask itself prior to hiring employees.
- How are new hires handled
- Employee files maintenance and security
- Employee termination and transfer procedures
- Government compliance as related to employee hiring and files record keeping
- Time and attendance tracking
- Employee record-keeping SOPs
- Where will mandatory posters be hung?
Payroll documentation regulations
- Protect employees
- Regulations keep employers in compliance with tax regulations
- Doc requirements provide an audit trail for government bodies
- Employee files are maintained by HR
- Employee info form is maintained by the payroll dept (some FLSA elements may not appear on the form)
- Child support
- Garnishments
EEOC (Equal Employment Opportunity Commission)
- Accurate and correctly maintained payroll records are important
- They reflect the treatment of the employees
- These records are private (i.e. not available to the employee) except in Illinois
Pay cycles/pay periods = how often should a company pay its employees?
- Daily payroll = usually related to daily labor often 1099.365/366 pay periods in a year.
- Weekly: 5-day workweek, usually paid every Friday (grocery/construction/prof offices). 52 pay periods in a year.
- Biweekly: 2-week period (26/sometimes 27 pay periods)
- Semimonthly: Paid twice per month. Not the same as bi-weekly. (24 pay periods per year)
- Monthly: Less freq used. Payroll paid once per month with occasional sem-monthly access to funds for employees. (12 payroll cycles).
Prepare Required Employee Documentation
Definition of employee:
- Employer directs worker’s performance
- Provides primary tools to complete assigned work
- Material contribution = The work employee completes involves effort
- Employer provides benefits
- Employer includes worker on gov reports
- Employer withholds payroll taxes
Definition of Independent Contractor:
- Employer does not direct the worker’s specific actions
- Employer does not provide tools to complete work
- Independent Contractor is responsible for their own payroll taxes
- Do not receive OT
Norm classified as an independent contractor, if specific situations are at hand they need to be included as an employee and not an independent contractor. Here is a summary of this.
- (Statutory employee rule) Certain driver positions are not eligible to be an independent contractor
- (Statutory employee rule) FT life insurance agents
- (Statutory employee rule) some at home workers that develop materials at home then return them to the employer
- (Statutory employee rule) FT traveling salesperson who works on a single company's behalf (other rules apply)
- Other situations applicable per the IRS current regulations
- 1) Behavioral control: the extent that the employer has the right to control and direct worker actions
- 2) Financial Control: guidelines on how a worker is paid (reimbursements, tools, payments)
- 3) Relationship of the parties: work-related contract info between the employer and the worker; benefits, how long this is expected to last, and the business operations summary.
IRS
- Firm/employer may request info from IRS on how to file
- Info can be found in IRS publication 1779
- Definition of Independent Contractor: = IRS Form SS-8
- Form W-4 file each January
Reporting new employees to the IRS
- Why is reporting imperative? immigration, registry monitoring, court- ordered applications, ethical violations, COBRA & child support
- Minimum doc allowed is: W2 and I-9 Forms
- W2: helps employers determine the correct amount of federal income taxes to withhold from the employee’s payroll
- I-9: eligibility to work on the US and all new hires be reported within 3 days of their start date
- Employer/payroll accountant must maintain W4 and I9 in permanent employee file
Reporting new employees to the State Offices
- Immigration Reform and Control Act mandates that employers notify state offices within 20 days of an employee’s start date
- Fines for not reporting new employees: $25 per unreported employee & $500 for intentional nonreporting
- Reporting new hires is complex/a lot of room for errors
- Office of Management and Budget (OMB) has a multi-state form to help (OMB Control No 0970-0166)
Foriegn workers
- Hiring foreign workers has additional challenges
- I-9, sometimes additional paperwork is needed
- Visa is needed or other immigration paperwork
- Employer will be fined if the correct paperwork is not submitted ($500 - $5,000)
- Employer must file IRS form 1042
Differentiations Between Exempt and Nonexempt Workers
- Nonexempt and exempt details are mained in payroll records
- Diff types of workers can be either exempt or nonexempt
- Exempt worker = Highly skilled workers (managers/salaried workers etc
- Nonexempt worker =
- US DOL = issues guidelines for exempt/nonexempt employee guidelines
- Generally salaried employees (do not receive OT for work over 40-hours)
- Not all salaried employees are classified as exmept
- Exempt from FLSA provisions
- Not subject to the FLSA wage and hour provisions
- To be marked as exempt, employee must meet all of the "Executive Exemption" requirements (salary, work type, knowledge)
- Receive OT pay for work over 40-hours
- Wage and hour laws pertain to
- To be exempt, must meet the following guidelines
- Temp employee = employee of an employment agency
- Leased employee = leased from recipient company, FT work, directed by the recipient company
- IRS code 414 has guidelines on the diff between an employee and a leased employees
- No more than 20% of a company's employees may be leased/temps
- Tax cuts: PEO (Proff Employer Org)= deductions may apply via sections 199A (temp or PT)
Pay records and employee file maintenance
- Payroll private personal records are the responsibility of the company's chosen payroll dept
- Most important part of a payroll dept is the maintenance dept
- Physical records of pay advice, time off, tardiness and OT
- Digital record keeping recommended
- Pay records = payroll freq, income tax schedules (IRS Pub 15-T)
- Internal controls are critical in insure the payroll system (time records are confidential)
- Strategics payroll system design should be completed prior to setting up payroll
- Set up scheduled payroll SOP review times
- File maintenance = Per the Int. Rev. Code record labeling and backup copies are required
- Maintenance procedures are regulated by the IRS Proc. 98-25
- FLSA = has min 3-year and 2 year record retainment standards
- Electronic records = record and safeguarding procedures
Pay rates
- Pay rate = Min wage rates + other wages
- Living wage calculator = http://livingwage.mit.edu
- OT rates are calculated by FLSA (CA OT is 8+ hours per day)
- Commissions = receiving a % of sales
- Piece rate compensation = connects employee compensation with the sale of a good or service that they prepared via work. CA has specific guidelines relating to piece rate time regarding back pay.
How an employee enters their workweek hours
- Web based applications (TimeStation, ClockShark, TImeDock) IPs and GPS locations
- Companies will need to set up with a precise way to track employee hours
- Time cards must be verified for accuracy by someone that knows the company's needs and the employee's sched (underpayment/overpayment issues)
- OT approval
Employee termination and documentation Procedures
- Keep records
- When an employee leaves a company the payroll dept needs to accomplish a few tasks related to the company's policies
- This includes the final paycheck with vacation or sick time and benefit info
- Severance packages are generally not-mandated (states have more info on this)
- DOL has guidelines on dates and procedures (CA w/i 72 hrs)
- Paper doc destruction = incineration or shredding
- Digital doc destruction (electronic accounting records) = follow cyber security procedures (DoD 5220.22-M
- Separate employee documentation into three separate privacy paper files for privacy requirements )private personal, Empl benefits, Investigative legal)
Other important payroll considerations
- Know your local and federal laws regarding OT pay, sick pay
- Prior approval for Leave of absence & time off (Keep a paper trail of requests for tracking)
- File security = all payroll files must be kept secure
- Regulation E = Electronic Funds Transfer Act, regulates paycard related fees & other paycard related info
- Payroll as a non-solo record/have multiple eyes on the payroll procedures and dept
- Sep of duties also applies to payroll accounting
- Data breach issues = ACT QUICKLY (fol the taxadmin.org procedures)
- If an employee is terminated (keep records for a min of 3 years), 6 years for empl benefits, 4 years for W4s and local tax, 3-5 years for payroll
- Even if a company outsources their payroll the company is still responsible for accurate reporting and payroll procedures
Summary
- Plan your payroll procedures wisely
- Plan with growth in mind
- Plan with payroll record security parameter safeguarding
- Plan based on your company's own limitations and strengths
- Consider record keeping and maintenance requirements (retention and destruction)
- Payroll is only as accurate as the info provided
