5 Payroll Laws You Need to Master

The Human Resources (HR) staff in any business performs a critical function. Serious consequences result if they do not have mastery over the federal rules and regulations related to payroll. Government agencies may levy fines against your business for non-compliance. Your staff will spend precious time correcting mistakes.

Underpayments and overpayments (which must be refunded by the employee) cause lowered morale.  Your business's reputation suffers, too. 

Essential Payroll Legislation   

There are five crucial federal laws concerning employee payroll. They are:

• Fair Labor Standards Act (FLSA)

• Federal Insurance Contributions Act (FICA)

• Federal Unemployment Tax Act (FUTA)

• Davis-Bacon Act

• Equal Pay Act 

Let's look at them one by one to understand their importance to payroll duties. 

Fair Labor Standards Act  

Congress passed the Fair Labor Standards Act (FLSA) in 1938. The FLSA provided guidance on the following business activities that affect employees:

• Minimum wage standards

• Overtime pay standards

• Recordkeeping of employee hours worked

• Child labor laws

• Wage garnishments

• Direct care workers

• Exempt vs. non-exempt employees 

Determining exempt vs non-exempt employees is a critical task. FLSA entitles non-exempt workers to minimum wage and overtime pay. Exempt employees are those that do not qualify for minimum wage or overtime pay. In general, exempt employees receive a salaried pay, not hourly pay.  

Minimum wage laws are enforced by the Wage and Hour Division of the U.S. Department of Labor.  

Federal Insurance Contributions Act  

The Federal Insurance Contributions Act (popularly known as FICA) is the payroll tax that funds Social Security and Medicare. In 2021, employees pay 6.2% of their earnings in FICA taxes. Employers pay 6.2% of employee earnings as the employer's share of Social Security taxes. Together, the taxes make up 12.4% of the employee's earnings. In addition, the government collects 1.45% of an employee's earnings to fund Medicare, and the employer matches that amount. Together, the employer and employee pay 15.3% in FICA taxes. 

FICA currently has a wage-based limit of $142,800 on Social Security taxable income. Income above the wage-based limit is not taxable for Social Security purposes. 

There is no limit on income subject to Medicare taxes. Employees who earn more than $200,000 in income a year pay an additional 0.9% in Medicare taxes.  

The IRS imposes penalties between 2% and 100% of the unpaid tax on employers who willfully withheld paying employment taxes to the government. The amount of the fine varies with the type of payments missed. IRS may fine employers who are late with payments.  

Federal Unemployment Insurance Tax Act 

Congress passed the Federal Unemployment Insurance Tax Act (known a FUTA) in 1939. FUTA imposes taxes on any employer who has employees. The revenue collected from FUTA goes to state unemployment insurance agencies to fund unemployment benefits and job programs. Employers pay FUTA contributions in either annual or quarterly payments. In 2021, the employer pays 6% unemployment tax on the first $7,000 the company pays to an employee each year. 

Employers who also pay state unemployment tax may get a credit up to a maximum of 5.4%, which lowers their FUTA payment to 0.6%. 

Employers who do not pay federal unemployment tax risk a penalty of between 2% and 15% of the amount owed. The percentage depends on how long the payment remains unpaid. 

Davis-Bacon Act  

The Davis-Bacon Act of 1931 applies to businesses that work on public projects for contracts over $2,000. The Act requires employers to pay "prevailing wages" to contractors and laborers in a particular craft or type of work in the local area. Contracts over $100,000 also require contractors and subcontractors to pay laborers, mechanics, and security guards one and one-half times the regular pay rate for work over 40 hours. Contractors may pay less than the prevailing wage if fringe benefits make up the difference. 

In 2021, the Department of Labor (DOL) set the prevailing wage in the District of Columbia at $10.95 per hour. The rate is in effect for all contracts subject to Davis-Bacon where the contract was awarded or solicitation issued after January 1, 2015. 

In general, prevailing wage rates exceed state minimum wage laws. Employers may find overall wage rates for other jurisdictions in the Online Wage Library.  

Equal Pay Act   

Congress passed the Equal Pay Act in 1963. The Act requires that men and women in the same workplace receive equal pay for substantially equal work. Equal pay refers to salaries, stock options, bonuses, overtime pay, profit-sharing, and even life insurance. The Equal Pay Act amended the FLSA to prevent gender discrimination in wages. 

The DOL Wage and Hour Division enforces the Equal Pay Act. Employers found to violate the act may receive fines up to $10,000, imprisonment for six months, or both. 

Employees may also sue in court, rather than file with the DOL. Employers who are guilty of violating the Act become subject to compensatory damages. If an employee proves willful disregard of the law, courts may impose punitive damages on the employer. 

Gaining Mastery over Payroll Legislation  

Mastering payroll legislation means studying the text of each law. It also means keeping up with the latest changes at the local, state, or federal level. It also requires an understanding of the regulatory agency guidance that provides the gloss on the legislative rules. 

Interpreting legislation is a skill that requires time and training. If your in-house HR team does not have team members with mastery over payroll regulations, consider outsourcing payroll activities and compliance.  HR outsourcing partners provide access to payroll experts at a fraction of the cost of hiring an in-house specialist.