By: Amy Fry, Staff Accountant/Payroll Admin

I’m sure employers have heard the words Payroll Compliance before, but do they know what it means, why it matters? Or how do they know if they are compliant?  Let’s dive in.

Payroll compliance simply means that an employer is following all federal, state, and local laws for paying their employees. Each of these agencies has their own rules and regulations, so it’s important to stay up to date.  This keeps employers from being hit with hefty penalties and interest or potential lawsuits.  This information can be found by going to www.irs.gov (Federal government), www.dol.gov (U.S. Department of Labor) and your specific state and city websites, or contact your Accounting Firm or Payroll Provider.  Below are a few key points to help you stay compliant.

1. Classifying employees correctly as either an employee or an independent contractor
2. Calculating employee wages, such as minimum wage and overtime accurately
3. Deducting & paying employee tax withholdings, deductions and garnishments correctly and on time
4. Keeping detailed employee records for required time periods
5. Reporting & documenting all necessary forms and report

Classifying employees correctly

Employers must determine whether a person is an employee or an independent contractor.  An independent contractor is someone who is self-employed, use their own tools, can work for multiple clients, pay their own taxes and control how and when they work.  Whereas a true employee is hired to perform specific tasks, receive compensation in the form or wages/salaries & benefits and work under the direction and control of the employer.

Calculating employee wages

The federal Fair Labor Standards Act (FLSA) requires that employees should be paid at least $7.25/hour to meet federal requirements, however many states have increased theirs.  For example, the State of Ohio has increased minimum wages to $11/hour for non-tipped employees and $ 5.50/hour for tipped employees starting January 1, 2026.  The FLSA also requires that employees be paid overtime, which equates to at least 1.5 times and employee’s regular hourly rate for all hours worked over 40 hours in a workweek.

Deducting & paying employee tax withholdings

When you have an employee, you must withhold payroll taxes and remit those payments to all the different tax agencies mentioned above.  Federal withholdings include Social Security (FICA), Medicare (both of which have a portion withheld for employees AND employers), along with any federal withholding that is based on how an individual files their personal tax returns. State withholdings can be figured by certain percentages (typically 2 or 3 percent), or the state of Ohio has tax tables that an employer can follow.  If an employer has employees in different states, check with those specific states for withholding information. There are also city and school districts that have required withholdings, so it’s important to know if your employees are required to withhold those taxes.  This information can be found here: https://tax.ohio.gov/help-center/the-finder/the-finder, using the employee’s address.  You should always withhold for a school district, but employers are not required to withhold for employees’ specific cities where they live.  This is considered a courtesy withholding.  It’s also important to know how to handle any extra deductions such as Child Support or other required garnishment and making all of these payments on time.  There are also Federal and State Unemployment taxes that are required to be paid by employers.

Keeping detailed records

It is important to keep detailed records of employee information, hours, wages and tax documents filed for 3-6 years.  Our recommendation is keeping the information for the longest period of time, use digital or physical storage and always check if your state has a longer requirement.

Reporting & documentation

Providing employees with their paystubs & W-2’s and filing all necessary reports with the appropriate agencies listed above.

Payroll compliance is super important to ensure payroll is accurate for employees, keeps the employer penalty free, builds trust and protects the reputation of the organization.  Employers can stay compliant by having regular audits, staying updated with each agency to monitor changes, and educate employees.  Employers can also implement an automated payroll software, such as Gusto for accuracy, timely tax payments, filings, updates and streamlined payroll.

Please reach out to Holbrook & Manter with any questions you may have.