How to Identify Important Payroll procedures and Pay Cycles

 Identify Important Payroll procedures and Pay Cycles 

1. EIN = employer documentation needed before any employees are hired 
2. FLSA = requires certain info in every employee file
3. US DOL = requires the following to be included in employee files
4. Full name as shown on the SSN card
5. Full address, with zip code
6. DOB if younger than 19
7. Sex and occupation type
8. Employee's workweek = time and day that the workweek begins
9. Hours = worked each day & worked each workweek
10. Employee's wages = basis on how they are paid
11. Hourly pay rate = regular rate
12. Straight-time earnings = total daily/weekly
13. Overtime = total workweek earnings
14. Additions & deductions = all taken or added to employee's wages
15. Pay period = total wages paid
16. Date of payment
17. 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)

New hire reporting ensures that new employees pay 

• 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 

Employees vs Independent Contractors

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

Statutory employees
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

The IRS uses three common tests to clarify if a worker is an employee or an Independent Contractor.  

• 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

Exempt workers

• 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)

Nonexempt workers

• Receive OT pay for work over 40-hours
• Wage and hour laws pertain to  
• To be exempt, must meet the following guidelines

Leased and Temp Employees

• 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

1. Plan your payroll procedures wisely
2. Plan with growth in mind
3. Plan with payroll record security parameter safeguarding
4. Plan based on your company's own limitations and strengths
5. Consider record keeping and maintenance requirements (retention and destruction)
6. Payroll is only as accurate as the info provided