Discover payroll compliance best practices to streamline workflows, enhance security, and evolve with regulatory standards.
Introduction
When you’re looking to power the world of work, the key to success starts with a disruptive product. After all, that’s your ticket to making a mark in the competitive $70 billion payroll market. However, another component plays an equally important role in safeguarding your company’s future and winning customers: ensuring your product meets payroll tax compliance requirements.
If you’re new to the payroll space, tackling compliance can seem daunting—and that’s perfectly understandable. Staying informed about the latest tax changes and guaranteeing the accuracy of calculations can be tricky, demanding, and, frankly, tedious. Still, compliance is absolutely essential in building a payroll product.
That’s why we’ve created this indispensable guide. It’s meant to be a startup payroll provider’s go-to resource. At Symmetry, our goal is to empower you with essential knowledge, so you can build your payroll product on a solid foundation of compliance.
What are payroll taxes, and who is subject to them?
The term payroll taxes refers to all taxes associated with a paycheck. Some payroll taxes are paid by employers and others are paid by employees. In the U.S., payroll taxes include:
- Federal, state, and local income taxes, which fund infrastructure and other government spending
- Federal Insurance Contributions Act (FICA), which includes Social Security taxes and Medicare taxes
- Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) taxes, which fund unemployment programs
Payroll taxes are mandatory and based on employees’ wages or salary. Employers are generally responsible for withholding the taxes employees owe (with some exceptions by state) and remitting them to the government. Employers are also responsible for filing and paying their portion of payroll taxes on time and in full.
What is payroll tax compliance, and why does it matter?
Payroll tax compliance involves complying with all federal, state, and local tax laws and regulations, specifically related to employee wages, benefits, and withholdings. If you are a payroll provider, compliance is key to ensuring your customers’ tax filings and payments are accurate, avoiding penalties and interest from getting those payments and filings wrong, and, in turn, earning customers’ trust and repeated business.
Of course, this is easier said than done.
Compliance is a major hurdle for most providers in people tech—and if you drop the ball, it costs your customers. A recent study reveals that over 50% of companies faced penalties for payroll tax noncompliance in the last five years. In one extreme example, the San Francisco public school system lost $34 million when its payroll system proved incompetent at tax compliance and paycheck calculations.
Dropping the ball on compliance doesn’t just create penalties for employers, it negatively impacts payroll providers in terms of the cost to support and respond to upset customers. In many cases, payroll providers also take on penalties themselves. And the domino effect doesn’t end there. When employees have errors on their paychecks, as the San Francisco Unified School District experienced, it impacts employee morale and retention.
All this to say, compliance is a crucial consideration in any payroll product you build.
The sooner you start accounting for payroll tax compliance, the stronger your payroll product will be.
Also read...A look into the payroll tax regulatory landscape in the United States
The tax regulatory landscape in the United States is complex in general; it becomes even more so for businesses that rely on remote, geographically dispersed workforces, which trigger multi-state payroll rules. So, let’s break down some of the basics.
First, taxes in the U.S. are more nuanced than in other countries. When it comes to income tax withholdings, you must account for not just federal income taxes, but also state and local income taxes.
In the local payroll tax environment, nearly 5,000 local taxing jurisdictions including counties, municipalities, and school districts, add to the intricate payroll tax environment. (With their thousands of different local taxes, Pennsylvania, Ohio, Michigan, and Kentucky are some of the most challenging.) And these taxes can vary based on the home and work locations of employees, further adding to the complexity.
Source: Tax Foundation
Separate from income taxes at the federal, state, and local levels, payroll providers in the US also need to tackle the taxes noted above: FICA, FUTA, and SUTA.
All of these taxation rules change not only from one state to another, but also as state and local legislatures write new legislation impacting taxation in areas like paid family and medical leave. California, New York, and New Jersey have the most challenging tax environments, largely due to their extensive tax codes, high tax rates, and strong enforcement policies. If you add minimum wage compliance to your payroll tax product, there’s even more to keep track of. In 2024 alone, for example, 22 states increased their minimum wage requirements, which is just one of the many, non-uniform tax law changes your payroll product has to account for.
Every year, there are many such tax policy changes that affect and matter to your customers. Take, for example, President Biden’s FY 2025 tax vision, which involves increasing taxes “by nearly $5 trillion for corporations and for individuals with incomes above $400,000.” If it goes into effect, it will significantly impact businesses and individuals across the country, and payroll providers will be on the hook for making sure they keep their employer customers and the people that they pay in compliance.
There’s a high risk of not being aware of and complying with these shifting regulations, as tax authorities like the Internal Revenue Service (IRS) impose hefty penalties for noncompliance with tax obligations—something that can be caused by mistakes made by employers or their payroll providers.
Also read...
Tax compliance across international borders
Then, there’s the matter of global tax compliance, as cross-border payroll calculations involve a whole other layer of complexity. Employers—and by extension, payroll providers—must comply with international tax codes, labor laws, and retirement and pension regulations in each country of operation. If you’re a payroll provider that offers employer of record (EOR) services or a payroll provider serving employers that have employees and workers all over the globe, this is particularly relevant.
“Global compliance adds an additional layer of complexity to a payroll service provider. Consider the complexity we face in the US., with states and localities rolling out their own set of often-changing rules alongside federal tax laws. Now expand that monitoring, tracking, and updating challenge globally, while becoming an expert in country-specific rules, regulations, tax languages, and processes—and imagine managing it all from the US for a global base of clients. Modern service providers trust Symmetry to be the experts in compliance, to track and manage this complexity so they can focus on delivering on their own roadmaps.”
Additionally, employee misclassification can be an issue if employers aren’t sure about or don’t communicate the workers’ nature of work and the appropriate category they should fall under. As a payroll provider, the onus is on your service to get ahead of this.
For example, let's say a customer of yours is based in the US and has a team of employees from various countries, including the US, Canada, the UK, Australia, and India. The company uses a combination of local contracts and global employer of record (EOR) services to manage payroll and compliance.
This presents a complex compliance scenario. Canada, the UK, and Australia have tax treaties with the US to avoid double taxation. However, India does not. In this case, you'd have to navigate multiple (international) jurisdictions and tax treaties to understand social security agreements, employee classification, and other local tax compliance requirements to ensure you adhere to the regulations. That can get pretty difficult to deliver the accuracy and peace of mind your customers trust you to deliver.
Also read...
The nitty-gritty of payroll tax compliance infrastructure
Based on market trends, customer demands will shift the industry towards a focus on choosing the right partner to build your payroll tax compliance infrastructure. For instance, Deel recently acquired Zavvy, a “Munich-based AI-based ‘people development’ startup,” as a part of its move to unify payroll and HR in one people tech platform. It won’t be long before others follow suit. So, getting a headstart with the right infrastructure in place—such as the Symmetry Tax Engine—to support your product is in your and your customers’ best interest.
If you are adding native payroll services to your platform, payroll tax compliance infrastructure is a must.
Think of payroll tax compliance infrastructure as the backbone of your payroll solution; it offers the technical framework you need to navigate complex regulations and compliance obligations.
You can either build compliance infrastructure in-house or leverage the services of a partner that offers plug-and-play compliance infrastructure. If you choose to work with a partner to provide the compliance layer of your payroll product, their infrastructure would efficiently and compliantly handle gross-to-net payroll calculations, withholding, and remittance of payroll taxes. Consequently, this would minimize tax filing errors for your customers and free up your team's time and resources to focus on core product development.
There’s also the added benefit of a shorter development cycle, which would allow you to respond to customer demands and bring your payroll product to market more quickly. Depending on your priorities, the ability to work on a fast timeline can be a significant competitive advantage.
Ultimately, working with a reliable compliance infrastructure partner will also give you peace of mind. Here’s why: You’ll effectively meet your customers’ tax compliance needs, knowing you don't have to worry about accuracy. And you will be able to concentrate on innovating—i.e., evolving and expanding your product features, improving user experience, and expanding your market presence—without being bogged down by the challenges of payroll tax compliance and calculations.
Navigating payroll technology: should you build, buy, or blend?
So, you want to offer a payroll solution in your platform, but don’t know where to start? This guide will help you decide whether to build in-house, use an embedded payroll solution, or get the best of both worlds.
Best practices for ensuring payroll compliance in your build
By now, you've already figured out that compliance can be complicated—but including it in your software product doesn't have to be. As you start thinking about how to address compliance in your build, there are a couple of things you should keep in mind.
According to a survey by Deloitte and PayrollOrg (formerly the American Payroll Association and Global Payroll Management Institute), compliance is the most-needed improvement in the payroll process, followed by accuracy, self-service capabilities, reporting, and next-gen technology adoption.
With that in mind, we've shared a few tips to help you create the best solution for your customers that solves their pain points:
Find a reliable partner: Whether you’re going with an embedded solution or outsourcing the compliance layer to a partner like Symmetry, you should be confident you're in it with a reliable, trustworthy solution—one that won't make your product look bad or negatively impact your customers. As you'll see in the next section, that's where Symmetry shines.
Work with experts: More importantly, payroll taxes require ongoing upkeep, from keeping up with changing regulations to updating the latest rates in your software. But when you work with experts who have vast knowledge from leading the industry for decades, you’ll know you’re in good hands.
Embrace technology and automation: According to Alight Inc.'s 2024 Company Payroll Complexity Report, “time spent on manual, repetitive activities,” “inconsistent data quality,” and “lack of integration between systems” were the most significant pain points around the payroll tax compliance process. Automation can solve all these problems; particularly, it can minimize errors in tax returns, so embrace the technology solutions as you integrate payroll into your platform.
Prioritize data security and privacy: Security and privacy should be at the core of your product as you deal with sensitive data such as social security numbers, addresses, and other personally identifiable information (PII). That’s why it's important to work with a trusted partner that has a secure API.
Why people tech companies turn to Symmetry
Symmetry is the best in the business—plain and simple. That’s why industry-leading providers like Gusto, Deel, and Paycor work with us to build their payroll solutions.
But let’s get specific for a minute.
The Symmetry Tax Engine (STE) is the most powerful payroll tax engine on the market. On average, it takes 3 milliseconds to calculate an individual's payroll, taking into account over 7,400 taxes, each with its own unique tax ID. The STE is known industry-wide for its precise, multi-state calculations through cutting-edge geocoding technology (literally the first of its kind) that determines taxes and state lines based on the exact latitude and longitude of home addresses.
As for security, the STE is stateless, so it doesn’t store any data, such as PII, and it encrypts all API communications in transit. Plus, an API Key is used for authorization. And that just scratches the surface of what Symmetry offers. Our suite of products is built to address your payroll compliance needs, and we pride ourselves on our team’s expertise and enthusiasm for supporting our clients. Take it from Netchex, one of our clients:
“Symmetry had a very detailed integration guide and a phenomenal technical staff that allowed us to get to market much quicker than if we had tried to tackle this on our own.”
Whether you’re starting a new payroll company from scratch or innovating the next generation of payroll solutions, you can rest easy knowing your product is built on the best foundation with Symmetry.