There are both federal and state laws, such as (Fair Labor Standards Act or FLSA), that require employers to pay their employees. These laws also establish the minimum wage rate, explain when employees must be paid, and detail situations like overtime. As a business owner, it’s in your best interest to contact the proper agencies prior to issuing any paychecks. If you break the law regarding paychecks, you could face legal actions, and severe penalties.
Before you start paying employees, make sure that you have the following items in order. If not, you will not be able to withhold the correct amount of taxes and pay employees the proper amount.
Issue Tax Forms
You required by the federal government, unless the employee is tax exempt, to withhold Federal Income Tax, Medicare tax and Social Security tax from an employee’s income. Whenever you hire a new employee make sure that you issue them a W-4. The new employee must complete the form by documenting which withholding conditions apply to them. This gives allows you to know how much federal tax income you have to withhold. Don’t forget to check with your state’s guidelines regarding local income tax as well.
You do not have to issue forms for Medicare and Social Security tax withholding. You can use the RS Circular E, the Employer’s Tax Guide to locate these rates.
Regardless if you pay an individual a salary or by the hour you still need to classify them as either an employee or independent contractor. By classifying employees, you are able to determine who is eligible for tax exemptions and who is not. Usually, a non-exempt employee can qualify for overtime, while you are not required to pay an exempt employee overtime.
Because these regulations can be complex, the Department of Labor released a 15-page memo that should be used to help you determine the classification of your employees. This is a simplified list from the 15 page memo of the Labor Department that you can start using to consider six major factors:
- Is the Work an Integral Part of the Employer’s Business?
- Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
- How Does the Worker’s Relative Investment Compare to the Employer’s Investment
- Does the Work Performed Require Special Skill and Initiative?
- Is the Relationship between the Worker and the Employer Permanent or Indefinite?
- What is the Nature and Degree of the Employer’s Control?
Classifying your employees allows you to issue them the proper forms, such as Form SS–8, and helps you to be aware of which taxes need to be withheld.
New Hire Reporting
You required under The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 to report newly hired employees to your state directory within 20 days of being hired. You must submit the following information: employer name, address and federal employer identification number, as well as the employee’s name, address, Social Security number and hire date.
Each state state varies, so please review the specific requirements of your state by visiting this directory on SBA.gov.
Decide When and How to Pay Employees
While the Fair Labor Standards Act (FLSA) requires employers to pay employees for payable hours worked when payable, it does not have a requirement for payment frequencies. However, most states set either a weekly, biweekly, or semimonthly payday schedule. For example, states like Nebraska and Pennsylvania allow the employer to designate paydays. States like Arizona make things complicated by requiring employers to pay employees twice a month, but 16 days apart.
Review the laws regarding the state-mandated minimum paydays by visiting this page on FindLaw.
After reviewing your state’s guidelines, you can should set-up a payroll frequency that works best for your business. Weekly paychecks are typically issued every Friday, while monthly paychecks could be issued on the first each month. Biweekly and semimonthly paychecks can be a little more confusing, so here are the main differences:
- Biweekly payroll are paydays that occur every 26 times per year, which would be every other Friday.
- Semimonthly payroll are paydays that occur 24 times per year, this could be on the 15th day and the last day of every month.
FLSA also allows you to determine how you wish to pay your employees. Cash, checks, money orders, and direct deposits are all acceptable forms of payment methods. You are even allowed to meet the minimum wage requirements by compensating employees through food, lodging, and utilities.
Employers are not permitted to pay employees with vouchers, coupons, discounts, or tokens.