Payroll Compliance: Follow These 4 Tips to Avoid Penalties

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

Published October 4, 2022.

Man sitting at a desk in front of a laptop, checking off items on three different documents

Is your company payroll compliant? If your business is adhering to all federal, state, and local rules and regulations pertaining to how employees are compensated for their work, your organization is running a tight ship. Still, it's critical to ensure that you're not unknowingly violating any laws. Being non-compliant could result in costly financial penalties that diminish your bottom line.

4 Tips to Avoid Penalties

Here are four tips to avoid penalties for being non-compliant:

1. Utilize Payroll Software

One of the best mechanisms to incorporate into your daily operations is by taking advantage of payroll software. Today's generation of payroll software includes various automated functions and additional features to simplify and streamline the entire payroll process.

Payroll software can perform a broad array of automated tasks, including calculating hourly wages or salary, performing tax deductions, completing retroactive pay, and managing overtime or double-time. Some of the other features can also help out your office with tax filing, expense management, direct deposit, and employee self-service.

» Is automated payroll software worth it? Compare manual vs automated payroll processes

2. Classify Employees Correctly

The modern-day workplace has been drastically altered since the coronavirus pandemic, from more employees working from home to hosting Zoom meetings throughout the day. Therefore, it might be easy to misclassify employees, but this can result in complaints and probes by legal authorities. There are five primary types of employee classifications:

  • Full-Time: These employees complete a predetermined number of hours each week and are generally paid on a salary basis, with other benefits, such as 401(k), healthcare coverage, and vacation pay.
  • Part-Time: These employees will typically work fewer than 30 hours per week and will be paid hourly.
  • Independent Contractor: These individuals will work as contract employees without being on the company's payroll. Compensation will depend on the project, the length of the contract, and the employer.
  • Temporary: These employees are hired on a short-term basis, such as during the busy holiday shopping season or when a company is inundated with work.
  • Intern: An internship is a professional short-term learning experience that may or may not include compensation. This position will offer training, skills building, and practical work experience.

If a firm misclassifies its employees, the company might not pay the required taxes for the worker, causing the government to miss out on critical tax revenues. Employees might not receive the minimum employment standards, while independent contractors might be unable to make business expense deductions.

» What is employee misclassification? Discover the consequences and how to avoid it

3. Keep to Deadlines

Like individuals, small businesses are mandated to submit an annual tax return on April 15. Employment tax forms are due every quarter (April 30, October 31, and January 31), while other documents may be due throughout the year. That said, it's crucial to submit the relevant documents and make necessary payments on time. Otherwise, the standard penalty is 0.5 percent of the unpaid tax amount for each month the total remains unpaid.

4. Conduct Regular Audits

Auditing is not the most beautiful word in the English language, but it's part of business. If anyone is suspected of not being tax compliant, an audit will be triggered. Because of this, a helpful pre-emptive strategy is to partake in regular internal audits.

While it can be an exhausting process, there are many benefits to consider:

  • Ensure compliance with government regulations and corporate policies.
  • Identify internal inefficiencies and waste.
  • Determine and promote the best practices for internal controls.
  • Review various protocols in each department of the company.
  • Detect or prevent fraud either internally or from an outside source.
  • Facilitate better communications between employees that can improve business systems and protocols.

» Can you prevent fraud in your business? Discover which internal controls you can implement

Confirm Laws in Different Locations

If your business operates in different states or even in other countries, it's imperative to understand labor and tax laws in other jurisdictions. Every location has its own set of rules, regulations, taxes, and laws that must be followed, otherwise, your company could be at risk of facing fines that can impact the bottom line or shut down the business altogether.

There are two ways to handle this issue:

  1. Use your resources and ensure you're complying with the public guidelines.
  2. Hire a professional employer organization (PEO), a joint-employment entity that performs a wide range of employee administration functions, including payroll management and benefits processing, on behalf of businesses.

» In-house payroll software vs outsourcing? Choose the best approach for your business


Tax laws change, labor regulations get updated, and some policies stay the same. Ultimately, it's crucial that companies stay up to date with laws, as they don't want to get blindsided by rules that are revised, leaving businesses vulnerable to audits and fines. Be it automated payroll software or hiring a tax expert, there are many tips to enable payroll compliance and avoid penalties.

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