Build Your Payroll Product With These Payroll Compliance Best Practices in Mind

Payroll products are becoming an essential part of any people tech platform, but today’s payroll has evolved past cutting checks. When building a payroll product, it’s critical to get payroll compliance right. Violations of payroll laws, such as employee misclassification, or violations of labor laws like the Fair Labor Standards Act, can put business owners (i.e., your customers) in danger of non-compliance. In other words, ensuring payroll compliance means the difference between your customers experiencing flawless paydays and potentially damaging and lasting repercussions like a tax audit from the IRS, legal trouble, or bankruptcy.

But building compliance into your payroll software doesn’t have to be intimidating. By establishing strong payroll compliance procedures now, you’ll save time, effort, and money later. These five best practices will keep your customers and their employees happy and tax compliant.

1. Make compliance easier for employees

One of the first payroll compliance best practices comes at employee onboarding. Your payroll processing product should have a solid foundation of compliance that’s easy for employees to understand. Provide your customers with guided workflows for employees that take them through their required payroll processing paperwork like federal, state, and local withholding forms. 

Your product should be able to use data it already has, like employees’ home and work addresses, to determine the right forms they need. Provide explanations along employees’ workflow journeys that teach them what each form is, why it’s important, and how to fill it out. For example, you can guide employees through filling out onboarding forms with a series of questions to help determine if the employee is exempt. Also provide employees access to their payroll records so future form-filling can be self-service in the future. 

This will help ensure the required forms are filled out correctly and compliance is met from day one.

2. Take data security seriously

Data security is another key requirement when thinking about payroll compliance best practices. Ensure privacy standards are met across your payroll system by using a cloud product with encryption. Depending on where your customers are located, they may be subject to different data regulations regarding collection, exchange, storage, and more. 

You’ll also want to regularly review and update your data protection policies, as these standards are always evolving. Remember, security is a priority, because you’re not only storing record-keeping documents like pay stubs, but also sensitive employee information that should not be readily available to your customers’ wider people teams, payroll teams, or human resources department. 

But how do you ingrain security into your payroll services? Consider a comprehensive security framework like SOC 2. This framework offers guidelines for managing and securing customer data based on five principles: security, availability, processing integrity, confidentiality, and privacy. Once you have security compliance established, ensure it’s maintained, with regular audits and employee training for peace of mind.

3. Embrace automation but enable customization

There is so much more to payroll compliance than payday, and your customers’ heavy administrative lift reflects that. That’s where automation can help. You can offer automated employee data collection, compliance monitoring, payroll data reporting, direct deposit, and yes, payroll processing. That could look like automated time tracking for timesheets, built-in alerts for compliance milestones like deadlines, auto-generated regular reports like compliance checklists, and automatic paycheck calculations. Running payroll can be automated based on previously specified data regarding tax elections, wages, withholding like social security, and benefits.

Some compliance categories where automation can be impactful include:

• Ensuring up-to-date tax rates, wage bases, and limits across federal, state, and local taxes
• Ensuring payroll details change as employees experience life changes, like moving to a new state or getting married
• Ensuring payroll tax filing and remittance follows up-to-date filing formats and schedules

While embedding automation across your payroll solution will help your customers save time and reduce manual payroll errors, there will always be instances where payroll processing needs to be reprocessed or rerun. There are also cases where overarching payroll management is required, such as offering a new benefit or paying out bonuses. Make it easy for payroll administrators to intervene in and manually override automated workflows so they are able to make custom changes when needed.

4. Stay on top of evolving tax regulations

Regulations are continually evolving to reflect technology advances and the ever-changing workplace. That’s why it’s a payroll compliance best practice to stay up to date on tax legislation. Understanding the broader landscape of regulation is critical to not only ensuring your customers are staying compliant, but your platform is as well. 

This can be an enormous undertaking, especially when it comes to navigating complex local payroll tax compliance in states like Ohio, Kentucky, and Pennsylvania. There may also be form changes that can be tricky to navigate, like switching independent contractors to Form 1099-NEC rather than 1099-MISC. That’s why another best practice is to seek assistance from compliance experts like Symmetry to help support you in areas you can’t tackle on your own.

Finally, your payroll software should provide resources to your customers to help them stay aware of regulations and maintain compliance. That could include sharing pertinent documents, websites, and educational content with customers on a regular basis, or housing these compliance aids in a dedicated area within the platform.

5. Support ongoing compliance

It’s important to think of tax compliance as a continuous state of being, rather than an action to cross off a list. It’s a set of controls and operations that have to be continuously updated and improved as the greater landscape changes, whether due to business expansion or growth, legislation, employee demographics, or world events like COVID. Just because your customers have a compliant payroll system one day, doesn’t mean it will remain compliant the next. That’s why creating a comprehensive plan for staying in compliance is a payroll compliance best practice. 

Ensuring the right people, systems, and processes are in place for constant monitoring and adaptation is essential to a successful payroll product. Incorporating ongoing platform iteration, updates, and refreshes will help your customers maintain compliance and keep them thriving.