In many growing companies, cash flow can be tight. Business owners may feel a temptation to delay paying their employees to manage cash flow. However, payroll processing is an important legal obligation. The rules around paying employees are strict and if it fails to follow the Fair Labor Standards Act (FLSA), federal and state agencies can intervene and levy large penalties.
The rules around paying employees are strict. If a company does it wrong, federal and state agencies may intervene and levy penalties. When completing payroll processing, try to keep the following tips in mind to avoid any issues or penalties.
1. Keep accurate records for payroll processing.
Employers can help protect themselves from payroll penalties by keeping correct time records of when employees worked, were off and were entitled to overtime.
What needs to be tracked can differ based on whether the employee's status is exempt or non-exempt. Having accurate records can help in wage disputes over payroll processing that may arise with a current or former employee.
2. Pay your employees on time.
In most places, the state dictates how often an employee must be paid at a minimum.
Any company can pay their employees more frequently if desired, but they can not pay less than required. There are four common pay schedules: weekly, biweekly, semi-monthly and monthly. To manage cash flow, most companies choose biweekly or semi-monthly for payroll processing.
It may be a good idea to publish payroll dates each year so employees can manage their expectations. If payroll is not paid on time, substantial state and federal penalties can accrue—and in some cases, it may lead to an owner's imprisonment.
3. Deduct proper withholdings from your employees.
Employees fill out W-4 forms to elect how much should be deducted from their paycheck. Employees can also have insurance premiums, charitable deductions or retirement contributions voluntarily withheld. But there are typically federal and state tax requirements of what needs to be withheld during payroll processing as well according to the employee's W-4.
Make sure the company has signed employee consent if they deduct expenses for items like uniforms, tools, meals or payroll advances. Additional funds can forcibly be withdrawn from a paycheck as a result of legal court orders like child support or student loans. However, withholding pay out of anger or punishment for the employee is not legal.
4. Get proper training in payroll processing.
Processing payroll can be complicated. Payroll processing includes a variety of changing rules on tax deductions for federal, state and local authorities. This can become especially difficult if the company has employees in many states.
Withheld tax deposits from payroll checks must be remitted to government agencies on a set schedule. Remember: Business employers can be personally liable for spending these funds and they can't be used for other purposes like paying expenses inside the business.
Consider keeping these monies in a separate bank account from the company operating funds as a best practice. Another solution can be using an outside service that processes your payroll, keeps track of all the deduction rules and remits these tax withholdings to agencies for the company.
5. Pay former employees correctly.
An employee's last paycheck generally needs to be paid on or before the next regular pay date. This may include any remaining unused vacation pay. If there is any overtime that was unapproved, some employers may elect to pay it out anyway as the penalties for not paying former employee wages can be substantial.
Employees can file a complaint with their state employment agency, which can result in an investigation or a lawsuit against the employer. Consequences can include owing back pay plus significant penalties.
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