Are Businesses Legally Obligated to Run Payroll?

Andrew Moran - Writer for TBR
By Andrew Moran
Michelle Meyer - Editor for TBR
Edited by Michelle Meyer

Published October 5, 2022.

Woman sitting at a desk and working on a laptop with reports and stationary next to her

Paying employees is one of the leading legal obligations of an employer in the U.S. Under no circumstances can an employer withhold an employee’s pay, not even a portion. Companies that do not pay their employees can face issues with federal and state employment agencies if reported or if such non-payments are discovered during an audit.

While businesses do enjoy the liberty of choosing how to administer payroll and on which days to hand out paychecks, there are other factors that companies must legally comply with in each jurisdiction.

Why Payroll Is Mandatory


Because payroll is mandatory, it is in every employer’s interest to ensure good recordkeeping, such as documenting payment amounts, recording relevant deductions, inserting hours worked, and monitoring overtime. This can help an employer in case an employee files a complaint against them, because the employer can show proof of payment. If the complaint moves beyond the business, state or federal officials will also ask for payment records. As a result, employers should take this issue seriously, particularly in the event of being audited by the Internal Revenue Service (IRS).

Tax Compliance

Businesses must follow the U.S. Department of Labor standards regarding minimum wage, overtime pay, and record keeping. Complying with tax laws—income tax, labor laws, and federal regulations—is imperative for businesses. The best way to facilitate an environment of effective tax compliance is by integrating payroll software into your day-to-day operations. Of course, there will be a discussion of manual vs automated payroll, but as long as you have payroll software, you can ensure better compliance.

» How do you choose payroll software? Discover essential payroll software features

Tracking Benefits

Employers should also keep track of employee benefits enrollment, such as healthcare plans, life insurance plans, retirement plans, and stock ownership. Employees should receive the correct deductions at the right time, and employers should not manipulate these numbers. Deductions must be made at each pay cycle, and a system should keep track of the benefit plans and their schedule.

» What are employee benefits? Discover the differences between employee compensation and benefits

Monitoring Cashflow

Wages are easily a business's greatest expense, therefore payroll analysis can help with cash flow. Poor cash flow is one of the biggest reasons why some employers resort to non-payment of wages. However, this will not be acceptable in any court, and employers will still be held accountable for any wages that they owe their employees. Businesses should be aware of their internal costs and match them with expected revenue to know things are under control. If there are any issues, close monitoring of the cash flow can enable employers to identify the causes and find effective solutions.

Establishing Trust With Employees

Non-payment of wages, regular lateness in payment, or incorrect amounts is always inadvisable because it destroys the employees’ trust in their employer. If they don’t trust their company, their work is likely to suffer, eventually hurting the company's bottom line. Therefore, smart employers understand the importance of keeping their employees happy because the more satisfied they are, the better their productivity and efficiency will be. Especially in this day of job-hopping and remote opportunities, employers must ensure they can retain talent. Therefore, non-payment of wages or paying employees non-competitive salaries will hurt the employer more than the employee in the long run.

Put simply, payroll can serve as an excellent tool to enhance employee engagement and happiness and facilitate a terrific company culture.

» What happens if an employee is misclassified? Discover how to avoid employee misclassification

Repercussions for Payroll Non-compliance

Payroll non-compliance can lead to a broad array of consequences for businesses. If an employer still refuses to pay their employees, several actions can be taken against them.


The first issue is that an injunction could be filed against an employer.


Employees can also file a lawsuit if they have been discharged without pay. Employees can also file a lawsuit to recover back wages owed to them.

Financial Penalties

Monetary penalties can also be imposed on an employer if they violate payroll requirements or repeat these violations.

Criminal Charges

Finally, if an employer continues to violate payroll obligations, they can face criminal charges, including fines and imprisonment.

» How can you ensure payroll compliance? Follow these tips to avoid penalties


Payroll laws will differ for each state or country. Wherever your business is situated, it is important that your company complies with these laws, rules, and regulations to avoid any negative fallout. So, it is always advisable to confirm the relevant laws. Indeed, payroll is a mandatory aspect from both a legal perspective and for effective business operations.

» Still uncomfortable with managing payroll? Consider outsourcing to a PEO

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