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Good or bad, 7 legislative changes that may impact your payroll

Published December 10, 2021

Payroll and payroll-tax compliance laws are complex, evolving and for many businesses a financial and administrative burden. This is solid reason to stay on top of any changes in your compliance requirements, or bear the risk of costly penalties, including unintentional slip-ups and breaches. You also don’t want to miss out on opportunities for financial assistance.

Who oversees payroll compliance?

A mix of federal, state and local authorities set payroll requirements and often make changes to them, sometimes annually, based on current trends and needs. Because of this, there are lots of rules and changes and a lot to unpack when trying to understand it all.

At the federal level, the two agencies that regulate payroll are the Internal Revenue Service (IRS) and the US Department of Labor. The IRS oversees your compliance with payroll tax rules and regulations. The DOL ensures that you meet wage and payment requirements set by each state and managed according to the Fair Labor Standards Act (FLSA), which was enacted to ensure employer compliance.   

Related: What is payroll and how is it calculated?

What payroll rules have changed, or are changing?

Several new legislative changes may affect your payroll processing and documenting responsibilities, as well as your financial accounting needs. We’ve put together our very own List of Seven.

1.      Independent contractors

California passed legislation in 2019 requiring companies who use independent contractors (1099 workers) to generate revenue for their businesses must classify these workers as employees, with eligibility for benefits.

The law, called AB5, became a point of contention among ride sharing companies such as Uber and Lyft. While these firms later received an exemption based on public vote, the law still applies to many other businesses. Perhaps more importantly, the Joe Biden administration remains in support of wider adoption. Stay tuned.

2.      Minimum wage rates

While the federal minimum wage remained at $7.25 in 2021, many states have increased their rates above the federal minimum. Here’s a look at state minimum wage laws. Additionally, many counties and cities apply their own minimum wage rates. In all cases, employers must pay the highest applicable wage. Best to know and understand which rate applies to you.  

3.      Paycheck Protection Program (PPP) loans

In response to economic suffering caused by the Covid-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March of 2020. Among other funds, the law eventually authorized $669 billion in forgivable loans to help small businesses retain workers and meet specific expenses including payroll costs, interest on mortgages, rent and utilities, and personal protection equipment and supplies. If businesses meet all requirements, the interest and principal on the loans are eventually forgiven. Again, you got to know how to properly apply and abide all requirements to take advantage of these funds. Learn more at U.S. Small Business Administration.

4.      Workers’ compensation insurance costs

Most states require you to purchase workers’ comp to cover the cost of potential on-the-job injuries to employees. Different states have different laws regarding workers’ compensation. Also, depending on your state, business classification code and industry group, your workers’ comp premium may increase or decrease in any particular year. For that reason, it’s more than a good idea to know what rate will apply to you, why and when. How do I find out my classification?  Contact the Census Bureau at 1-888-756-2427 or [email protected]. You can also look it up via the North American Industry Classification System (NAICS). This U.S. Census Bureau page should help you get started.

5.      Social Security tax

Social Security tax has a wage base limit, or maximum wage that’s subject to the tax for that year. For earnings in 2021, this base increased to $142,800 from $137,700 in 2020. This means that employer and employee pay a 6.2 percent social security tax for annual salaries up to $142,800. The 6.2 percent rate is unchanged from 2020.

6.      Retirement contribution limits

The total 401(k) contribution limit increased to $58,000 in 2021, up from $57,000 in 2020. The total 401(k) limit includes employee elective deferrals and employer contributions. The limit for IRA contributions remained flat with 2020 at $6,000. Here’s a summary, including annual compensation limits. The Treasury Department adjusts the rates annually based on inflation, which increased in 2021.

Benefits of outsourcing payroll

Your ability to meet payroll and comply with all payroll compliance standards is one of the most vital functions of your business, as important as keeping the lights on. If you can’t pay your people on time and consistently, you risk losing them, or even losing money to noncompliance penalties.

Problem is, payroll responsibilities are complex, time consuming, costly and ever changing. It’s a tough job to do in-house, especially for smaller businesses. That’s why more companies are choosing to outsource payroll to secure, third-party technology and service providers.  You offload the meticulous detail of benefit deductions, tax withholdings, wage garnishments, new hires and terminations and changing government regulations – federal, state and local. Most of all you save time, your most precious and limited resource, while putting more of your people to task on core value pursuits, such as growing the business. 

More businesses want to eliminate the cost of running a dedicated, in-house payroll operation. They also want to eliminate or greatly reduce the risk of costly penalties for misclassified information, or breaches of personal data, such as Social Security numbers and home addresses.

Related: Should your business outsource HR?

How does outsourcing payroll work?

You already have all the data you need to make payroll accurate and automatic. You just need to hand it off. Your payroll solution provider can then assimilate your data on employees, salaries, hours, vacation and benefits policies in a system that is managed by experts in compliance, reporting and federal and state tax considerations.

But be sure to pick carefully. In a recent EY Global Payroll Survey, 32 percent of respondents found it difficult to conduct business with their payroll service. Questions to mull over when choosing a provider include: Market experience? Market reputation? Personalized service? Dedicated service rep? Self-service model? Cloud based?

Self-service functionality is increasingly important in payroll outsourcing, especially when it comes to convenience, breadth of capability and ease of use. Do your research, the last thing you want is a hard-to-use system. Look instead for a secure, cloud-based payroll solution that will save time, cut costs, automate tracking and eliminate mistakes and penalties.

Need more information?