Payroll compliance means adhering to all federal, state, and local regulations governing employees' pay. Adhering to these laws helps businesses avoid costly penalties and lawsuits that can hurt operations. In 2024, employers need to understand the regulatory changes to stay on the right side of payroll laws.
While diving into the minutiae of payroll laws is admittedly dry, being aware of the shifts can pay significant dividends. Even unintentional mistakes can lead to government fines, back taxes, and plummeting employee morale. Additionally, the rules constantly evolve across different jurisdictions, making compliance a moving target.
This article will summarize the major updates to federal and state payroll compliance regulations for 2024. We'll also detail some best practices for avoiding common compliance mistakes. For business owners overwhelmed by payroll administration, we’ll explain how partnering with a Professional Employer Organization (PEO) can eliminate compliance worries.
Now that we've covered the importance of payroll compliance, let's review some of the key federal updates that will impact businesses in 2024.
One major federal change for 2024 is an increase in the Social Security wage base. The annual limit on earnings subject to Social Security tax will rise from $160,200 to $168,600. Consequently, the maximum Social Security tax that can be withheld from an employee’s pay will climb from $9,932.40 to $10,453.20. Employers will see their maximum Social Security liability grow by the same amount for high earners.
While most workers won't notice this change in their paychecks, the adjustment is necessary to maintain funding for Social Security benefits. The wage base grows yearly to keep pace with average national wage increases. Companies should double-check their payroll software to ensure the new limit is programmed for 2024 calculations. Miscalculating Social Security withholding could lead to IRS penalties.
With the first crucial federal update covered, let’s move on to changes in retirement plan contribution limits that employers should be aware of this year.
In 2024, the 401(k) plan contribution limit will increase from $22,500 to $23,000. This allows employees to set aside more pre-tax earnings for retirement in these employer-sponsored accounts. The catch-up contribution limit for workers 50 and over will remain unchanged at $7,500. As such, those eligible can contribute up to $30,500 to 401(k)s starting next year.
With this higher limit, employers should update their payroll systems to allow for increased contributions. Confirming the proper settings will let your workforce maximize their tax-deferred retirement savings. The 401(k) limit typically creeps up bit-by-bit each year based on inflation. So, while the change seems small, it does make a difference over time.
Moving along, another employee benefit with new limits for 2024 is the flexible spending account for healthcare expenses.
The contribution limit for flexible spending arrangements (FSAs) will also increase in 2024. While the new limit is still to be determined by the IRS, it will likely see a slight bump up from the current $3,050. FSAs must be adjusted annually for inflation.
Employers who offer these accounts should keep an eye out for the official 2024 limit later this year. Once released, businesses must confirm their FSA plan documents reflect the change. With health care costs always on the rise, even small expansions to these accounts can help employees cover their medical expenses in a tax-advantaged way.
As a whole, the major federal payroll changes for 2024 involve tweaks to taxable wage bases and pre-tax retirement and healthcare contribution limits. Now that we've covered the national updates let's shift our focus to the state level.
In addition to minimum wage, state unemployment insurance (UI) taxes are also changing for 2024. According to SAGE 100, employers can expect the taxable wage base for UI to increase in some states such as:
Moving right along, paid family leave laws are expanding in many states. These new programs allow employees to take paid time off for significant life events, with the benefit funded through payroll taxes.
In addition to minimum wage and unemployment insurance adjustments, many states are expanding access to paid family and medical leave through new laws taking effect in 2024. Here is a list of new paid leave laws:
These new laws ensure more employees can take paid time off for major life events. However, they also create additional administrative work for organizations to adjust their payroll processes and systems.
Now that we’ve covered federal and state payroll changes, let’s pivot to discuss some common compliance pitfalls to avoid.
With payroll regulations varying across federal, state, and local jurisdictions, compliance mistakes can easily happen. But what are the most common errors companies make that can lead to fines or penalties? Here are a few significant pitfalls to avoid:
Misclassifying employee exemptions - Employees can claim exemption from federal tax withholding, which is subject to IRS review. The employer can be liable for back taxes if the exemption is invalid.
Misclassifying workers - Incorrectly labeling employees as independent contractors can lead to unpaid taxes and overtime. Fines often apply.
Equal Pay Act issues - Not compensating men and women equally for the same work violates the EPA. This leads to lawsuits and damage to the brand.
Workers' comp errors - Incorrect job classifications and payroll data can alter workers' comp premiums during audits. Employers may owe additional costs.
Not tracking hours properly - Improper timekeeping leads to incorrect pay and potential overtime violations.
Incorrect W-2s - Errors on these year-end tax statements cause major issues for employees.
While mistakes happen, being aware of the common pitfalls can help avoid or catch them early. Now, let’s turn our focus to some best practices for payroll compliance.
With pitfalls aplenty, what are some best practices that can help organizations stay compliant? Here are a few key pointers:
Use payroll software - Automating payroll avoids manual errors and guarantees compliance with the latest regulations.
Review worker classification - Make sure employees and contractors are classified correctly to avoid unpaid taxes.
Robust time tracking - Accurate time data ensures proper pay and avoids overtime violations.
Deposit withholdings on schedule - Withholding taxes must be paid according to deposit schedules or penalties apply.
While nothing prevents mistakes completely, savvy workflows and technology provide significant advantages. For business owners lacking specialized payroll expertise, another option we'll explore is outsourcing this function.
Penalties for payroll non-compliance can be severe, while rules constantly shift across jurisdictions. This complexity takes focus away from core business activities. A Professional Employer Organization (PEO) can be an invaluable partner for organizations lacking specialized payroll and HR expertise.
PEOs handle all aspects of payroll, benefits, HR compliance, employee training, and parts of the talent acquisition process. This alleviates the administrative burden for in-house HR teams. As compliance experts, PEOs stay current on the latest federal, state, and local laws. They also leverage advanced technology and workflows to avoid errors and minimize risks. This gives organizations confidence that payroll taxes and filings will be handled correctly.
For business leaders seeking payroll compliance confidence alongside value-added HR capabilities, a PEO is the ideal strategic partner.
But does your business need assistance in HR compliance? One way to tell is by taking Easework’s free, five-minute HR assessment that will give you a Risk Score detailing your vulnerability to Wage and Hour disputes. The average company gets a score of 60/100.
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