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HR's Guide to Payroll Compliance [+ Checklist]

Payroll can be one of the most stressful aspects of HR administration - from ensuring everyone is correctly classified to managing federal and state requirements.

Elle Mason

by Elle Mason - August 16th, 2022

Payroll can be one of the most stressful aspects of HR administration - from ensuring everyone is correctly classified to managing federal and state requirements - it’s no wonder mistakes are common.

But given the consequences, this is an area that employers can’t afford to get wrong. Mistakes in payroll - such as employees not being paid on time - will demoralize staff and drive them to leave. They may also result in fines from the federal government.

This article is intended to provide an overview of payroll compliance. However, because payroll is governed by the federal and state government, the ultimate compliance requirements will be specific to your business. This article isn’t intended to be exhaustive or provide legal advice.

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Check out HR's Guide to Compliance to learn about more compliance issues.

Five Common Mistakes in Payroll Compliance

Failure to report taxes

Typically, most employers will need to submit Form 940, Form 941, W-2’s and 1099’s for all employees and contractors. Failure to do so will result in fines or other penalties from the IRS.

Missing deadlines for taxes

Some forms (Form 941) are filed quarterly while others (W-2) are annual. Because different forms have different deadlines, it can be easy for employers to miss a tax deadline accidentally.

Incorrectly classifying contractors

Employees and contractors have different work structures and different tax responsibilities. The IRS provides guidance that describes the difference between the two classifications.

Incorrectly classifying exempt vs. nonexempt employees

Non-exempt employees are covered for overtime pay, while exempt employees aren’t. Given this, a wrong classification can quickly result in payroll errors. Miscategorizing a non-exempt employee as exempt can result in fines, penalties, audits, and potentially even lawsuits for back pay.

Incomplete onboarding and reporting for new hires

Forms like the I-9 and W-4 are critical for tax deductions and must be added to the state directory. Failure to upload all of the required documentation leads to penalties and other challenges.

Key Payroll Compliance Requirements

Federal Income Tax

Employers must withhold a variety of taxes from the employee’s paycheck. The amount is determined by IRS-specified methods, and is either by bracket or percentage - and is also based on the exemption statuses indicated on the W-4. The amount withheld is reported to the IRS and the employee.


Federal Insurance Contributions Act taxes (FICA) and federal unemployment taxes (FUTA) are required. While employees also contribute to FICA, FUTA is paid solely by the employer on a quarterly basis. FICA taxes are deposited based on the pay schedule but are also reported on a quarterly basis.

Employee Benefits

According to the IRS, “Any fringe benefit is taxable and must be included in the recipient’s pay unless the law specifically excludes it.” Benefits often includes moving expenses, mileage reimbursement and work clothing expenses.

Employee Classification

As mentioned above, employee vs. contractor classification is critical. Generally, employees are provided with a schedule, work equipment, benefits, and have taxes withheld - while contractors have more independence in how, where, and when they work and they are responsible for their own taxes.


The Fair Labor Standards Act governs overtime and minimum wage - employers are responsible for abiding by the minimum wage, paying overtime, and following child labor standards for workers under 18. This is also where exempt vs. non-exempt comes in - as exempt employees are not entitled to overtime. 

State Requirements

These vary from state to state but most employees are responsible for withholding state income taxes, as well as following guidelines and regulations around state payroll compliance, minimum wage, overtime, or anything else that may differ from federal standards.

How GoCo Streamlines Expense Reimbursements

Payroll management is undeniably a stressful and complex aspect of HR administration, especially regarding compliance. Missteps can have serious implications, leading to demoralized staff and potential fines from government entities.

Wouldn't it be helpful to have a tool that simplifies one aspect of the process? GoCo's Expense Reimbursement Template is what you're looking for! 

This template takes the stress out of managing employee expense reimbursements. Gain clear insight into who is spending what and why, thus improving your financial management and transparency. Plus, employees can initiate the process at any time, from anywhere, further streamlining operations.

Here's how it works:

  1. Send a unique permanent link to your employees for all their reimbursement requests.

  2. The employees then enter the expense details and upload an image of the receipt or invoice.

  3. Automatic notifications inform you when an expense request is ready for review and approval.

  4. Finally, use reports generated by the system to incorporate approved reimbursements into your payroll swiftly.

We're offering our Expense Reimbursement Template for free, so you can experience firsthand the revolutionary change it can bring to your payroll management. Try it today!

Payroll Compliance Checklist

  1. Determine if your new hire is an employee or a contractor.

  2. If they’re an employee, determine if they’re exempt or non-exempt.

  3. Complete the I-9 and W-4.

  4. Add the employee to the payroll system.

  5. Set up direct deposit.

  6. Report new hire information to the state.

  7. Add all necessary information to your internal database.

  8. Retain all employee documents in accordance with state and federal laws/

Although this guide isn’t exhaustive, there are many payroll solutions - such as GoCo - that can help you manage payroll compliance, keep teams aware of upcoming deadlines, and provide critical checklists so that nothing falls through the cracks.