A payroll compliance checklist for US companies

Let’s be honest, managing payroll can be a complex process. One of the factors contributing greatly to that complexity is compliance with the various federal, state and local legislation.

As an employer, payroll compliance places all kinds of obligations on you; avoiding penalties, building employee trust, and keeping your business running smoothly to name a few. This payroll compliance checklist is designed to provide U.S. companies with a practical guide to seamlessly meeting federal, state, and local requirements.

What does payroll compliance include?

Payroll compliance refers to the adherence to all federal, state, and local laws and regulations governing payroll processing, employee wages, taxes, and recordkeeping. Employers are responsible for:

1. Accurately calculating wages according to applicable laws (e.g., FLSA minimum wage and overtime rules).
2. Timely tax withholdings for federal, state, and local income taxes.
3. Maintaining proper records to meet compliance standards set by bodies like the Department of Labor (DOL) and IRS.
4. Staying updated on changes in payroll legislation to ensure ongoing compliance.

Fair Labor Standards Act (FLSA)

The FLSA establishes the federal minimum wage that you must pay (though state laws may set a different figure, in which case the higher of the two is payable). The legislation also mandates overtime be paid when an employee works more than 40 hours per week. A poster stating FLSA requirements must be displayed in the workplace.

With the rise of remote work, employers must also consider how FLSA regulations apply to employees working across state lines. Tracking hours accurately becomes critical for compliance.

Relevant government body: Department of Labor

Equal Pay Act (EPA)

Again, the key measure here is about rates of pay. Men and women performing substantially similar jobs in the same establishment must be paid the same.

Recent state legislation has expanded equal pay protections, requiring companies to conduct regular pay audits to ensure compliance across all demographics.

Recommended reading: four key principles of HRMS payroll management

Employers must pay male and female employees the same wage for the same job. One key amendment is the Lilly Ledbetter Fair Pay Act, 2009 which states that the 180-day statute of limitations for filing an equal pay suit runs from the date of the most recent paycheck (effectively increasing the possibility of a claim).

Relevant government body: Equal Employment Opportunity Commission

Federal Income Tax Withholding

Employers must withhold a mandated percentage of employee wages and pay it to the federal government. Form W-2 must be filed for each employee.

Relevant government body: Internal Revenue Service

Federal Insurance Contribution Act (FICA)

In addition to income tax withholding, employers must make similar deductions from employee wages to cover Social Security and Medicare tax. The latest rates can always be found on the IRS website.

Relevant government body: Internal Revenue Service

Federal Unemployment Tax Act (FUTA)

Unemployment tax is a payment by employers (not a deduction from employee wages) to fund federal unemployment programs. The likelihood is that you will have a state unemployment tax as well.

Relevant government body: Internal Revenue Service

Consumer Credit Protection Act (CCPA)

When an employee owes a debt following a court order or other legal procedure (such as state tax collection, or an order from the IRS), the employer is required to garnish (i.e. withhold a portion) of their wages.

Relevant government body: Department of Labor

Affordable Care Act (ACA)

Employers with more than 50 employees must offer a ‘minimum essential coverage’ health insurance option to their workforce or make a shared responsibility payment to the IRS. The employer also has reporting responsibilities, both to the IRS and to employees.

As of 2024, ACA reporting requires greater accuracy, particularly for electronic filings where thresholds for mandatory e-filing have been reduced. Employers must ensure that forms like 1095-C are completed and submitted correctly.

Relevant government body: Department of Health and Human Services & Internal Revenue Service

Payroll compliance changes you need to know in 2025

Staying compliant requires staying informed. Here are some recent updates to consider:

1. Wage threshold adjustments: A federal court recently struck down a proposed rule to increase the salary threshold for white-collar overtime exemptions under the Fair Labor Standards Act (FLSA). While the rule aimed to raise the exempt salary threshold, its reversal leaves the current threshold intact. Employers should monitor potential future changes to this exemption rule, which could significantly affect payroll compliance for salaried employees.
2. Remote work tax implications: The rise of remote work has led to complex tax implications, especially for multi-state employers.
3. Health coverage mandates: Enhanced ACA reporting requirements demand greater accuracy in filing forms like 1095-C. Employers should prepare for stricter scrutiny of Forms 1095-C and 1094-C to avoid penalties.
4. Payroll technology integration: To keep pace with increasingly complex compliance rules, many companies are adopting payroll software that automatically adjusts for legal updates, minimizing the risk of errors and ensuring timely filings.