Does your current payroll process leave you vulnerable to costly non-compliance penalties?
Consider the recent case faced by Air Canada. A miscalculation led to the overpayment of part-time workers for nearly ten months.
Such errors are a reminder of the complexities inherent in payroll management. On average, about 40% of small businesses average 845 in IRS penalties annually due to payroll inaccuracies.
The IRS also reports that 33% of employers commit payroll errors, costing businesses billions yearly.
In this article, we’ll look into the critical aspects of payroll compliance. We’ll explore why it matters, the challenges payroll companies face, and the solutions available.
Why Does Payroll Compliance Matter So Much?
Payroll non-compliance can have far-reaching consequences for businesses, affecting their financial stability, reputation, and ability to operate smoothly.
Here are some of the key reasons why payroll compliance is so crucial:
1. Results to Penalties and Fines
Non-compliance with payroll regulations can result in substantial penalties and fines.
These include penalties for tax miscalculations, missed deadlines, failure to classify employees properly, and violations of overtime laws and the Equal Pay Act.
For example, the IRS imposes a penalty of 0.5% of the unpaid tax liability for each month or part of a month that the tax remains unpaid, up to a maximum of 25%. Failure to file Form 941 (Employer's Quarterly Federal Tax Return) can also result in a penalty of 5% of the unpaid employment taxes for each month or part of a month that the return is late, up to a maximum of 25%.
These payroll tax compliance fines can quickly add up and significantly impact your company's bottom line.
2. Leads to Reputational Damage
Non-compliance erodes employee trust and damages client relationships.
When employees experience issues with their pay, such as incorrect calculations or late payments, it leads to decreased morale and productivity.
This can harm your company’s reputation within the industry, making it more difficult to attract and retain top talent.
3. Legal Ramifications
Payroll non-compliance exposes companies to various types of lawsuits from employees.
Such lawsuits are costly to defend and result in significant settlements or judgments. In addition to the financial impact, legal battles consume valuable time and resources.
4. Wasted Resources
Dealing with the consequences of payroll non-compliance can be a significant drain on a company's resources.
The time and effort required to fix errors, handle audit reports, and address employee complaints can be substantial.
5. Operational Disruptions
In severe cases, regulatory authorities may freeze your accounts or halt operations while investigating.
These disruptions can have a ripple effect throughout the organization, impacting productivity, customer service, and overall business performance.
The time and resources required to resolve these issues can also be substantial, further compounding the financial and reputational damage.
Why Is Payroll Compliance So Difficult?
Payroll seems deceptively simple: calculate wages, cut checks, and file some forms. But the reality is far more complex. Several factors contribute to the difficulty of maintaining payroll compliance:
1. Complex and Ever-Changing Regulations
One of the primary challenges is the constantly changing federal, state, and local tax laws. These regulations change from year to year and sometimes even within the same year.
Changes to the Social Security wage base or new equal pay legislation can impact payroll calculations and reporting requirements.
For example, in 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced several temporary changes to payroll tax laws, such as the deferral of employer Social Security tax payments.
Keeping up with these changes and ensuring compliance requires dedicated effort and expertise.
2. Outdated Systems & Technology
Many payroll companies still rely on manual processes or outdated technology for their payroll management.
These systems are prone to errors, such as miscalculations, missed updates, and security vulnerabilities. Manual data entry and spreadsheet-based processes increase the risk of human error, which can lead to compliance issues.
Additionally, outdated systems may not have the necessary features and safeguards to ensure compliance with the latest regulations.
3. The Evolving Nature of Work
The rise of remote work, gig workers, and new employment models has created additional challenges for payroll compliance.
Remote employees may be subject to different tax laws depending on their location, requiring companies to navigate a patchwork of state and local regulations.
Similarly, classifying workers as employees or independent contractors is complex, and misclassification can lead to significant tax and legal consequences.
5. Poor Interdepartmental Communication
Effective payroll compliance requires close coordination between HR, finance, and compliance teams. However, poor communication and lack of coordination between these departments often lead to errors and oversights.
For example, if HR fails to promptly notify you of a new hire or a change in an employee's status, it can result in incorrect payroll calculations and reporting.
How Can Payroll Companies Achieve Compliance?
What do you need to do to ensure payroll compliance? Here are some key strategies:
1. Partner with Experts
One effective way to navigate the complexities of payroll compliance is to partner with experts. This involves teaming up with tax advisors to supplement in-house knowledge.
By working with experienced professionals who stay up-to-date with the latest regulations and best practices, payroll companies can minimize the risk of errors and ensure compliance.
Partnering with a payment processor, such as iCG Pay, can also be a game-changer for payroll companies.
iCG Pay offers powerful omnichannel payment processing solutions that simplify complex payment processes. We combine ACH and credit card processing to help pay workers efficiently while prioritizing payment security.
And with built-in security features, we prioritize safeguarding sensitive information, reducing the burden on payroll companies to maintain compliance.
2. Invest in Technology
Outdated systems are a recipe for disaster. Modern payroll software offers automated updates and built-in error checks.
For example, iCG Pay has a flexible API directly connects your payroll software and its secure payment processing platform.
iCG Pay's API can enable batch payment processing, quickly deposit wages into employee accounts, and improve satisfaction. It can also help streamline payroll reporting and ensure you meet critical payroll deadlines, like filing payroll taxes and submitting end-of-year reports.
You can also consider integrating technologies such as a robust time and attendance system to accurately track employee hours and maintain FLSA compliance, especially for limited companies.
3. Education and Training
Ongoing education and training are essential for payroll staff to stay current with the latest regulations and best practices.
Your company should prioritize regular training sessions, webinars, and workshops to ensure the team is well-versed in compliance requirements.
Alternatively, partnering with providers that employ certified experts can help ensure high compliance knowledge and expertise.
4. Regular Audits and Reviews
Proactive internal audits and reviews are crucial for identifying and addressing potential compliance issues early on and fraud prevention.
Establish a regular schedule for conducting compliance audits to review your processes, documentation, and reporting to ensure accuracy and adherence to regulations.
iCG Pay: Your Partner for Secure, Compliant Payment Processing
You've addressed the complexities of payroll calculations, tax regulations, and the potential pitfalls of outdated systems, but you need a long-term solution to ensure secure and compliant payment processing. Partner with iCG Pay.
We understand the sensitive nature of payroll data. That's why we are a Level 1 PCI-DSS certified service provider. Our platform leverages tokenization, end-to-end encryption, and anti-bot measures to safeguard data while minimizing your PCI scope.
You can also use iCG Pay API, which integrates with popular payroll software.
Integrating iCG Pay with existing payroll systems can enhance your compliance efforts without disrupting current workflows.
Schedule a 30-minute call to discover how our personalized solutions can help your payroll company streamline operations.
