Payroll Compliance Checklist & How to Remain Compliant

In brief: 

• Payroll tax registration compliance refers to a business’s obligation to register with tax agencies in each jurisdiction in which it employs workers, and to comply with those agencies’ particular tax guidelines.
• Businesses need to know which agencies to register with, how to properly classify and submit information regarding their workers, which rates to use for taxes/wages/benefits/contributions/etc., when they need to deposit taxes and file returns, and how long to keep payroll records for.
• A third-party payroll tax registration service should be able to adapt to differences in jurisdictional requirements, help handle registration fees, sort communications from different tax agencies, and automate the recording, organization, creation, and submission of payroll-related information and reports.

If you’re like many businesses that rely on a payroll system to streamline compensating and taxing the people who work for you, that system has to be registered with the proper federal and local (usually state, in the US) authorities. This lets them administer taxes, benefits, and other payroll-related finances.

Improper or non-existent payroll tax registration can have serious consequences for you as a business. These include having to back pay employees and taxes, increased auditing, fines and other financial penalties, and even criminal charges (and their associated legal costs). In a worst-case scenario, you could even lose your good standing and operation privileges — either temporarily or permanently — in a particular jurisdiction.

So how do you make sure to get this right? You go into it prepared, knowing what you need to know and do ahead of time. To help, Middesk has put together a payroll compliance checklist of what you have to think about when registering for taxes, what you should do to stay compliant, and how third-party services (like Middesk) can smooth out the process. We’ll cover:

We begin with an explanation of what it means to be registered for – and compliant with – payroll taxes, and what types of businesses need to pay attention to these requirements.

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Payroll tax registration compliance means ensuring your business’s payroll system is registered with the jurisdictions your business operates in, and adheres to each of those jurisdictions’ applicable tax laws. These include who or what needs to be taxed, and where to pay the tax to. 

In the US, tax laws can differ at the state and local levels. So if you’re a business (or provide financial services to one) that operates in multiple US jurisdictions, you need to be aware of which laws are applicable to you in which locations, besides the country-wide federal ones.

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Any business that utilizes a payroll system, or may interact with said system on behalf of another company, has an interest in ensuring the system is properly registered with the relevant tax authorities. Such entities include:

• Employers: All businesses that hire employees need to register to pay taxes in the states where they operate.
• Payroll Providers: When working on behalf of other businesses, payroll services need to ensure that they account for where those businesses have employees working. That means having the business both registered for payroll tax in those states and complying with applicable local payroll tax laws. 
• Accounting Firms: Accounting firms also need to check that companies they work for have properly implemented payroll tax deductions in order to ensure the books are balanced correctly.

If you fall into one of the categories above and need a payroll tax registration solution, learn how Middesk’s Tax Registration tool can help you register for payroll taxes in as little as 10 minutes, and can save you up to 5 hours of work per state you operate in.

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Registering for payroll taxes properly involves several facets that bring together researching, collecting, submitting, and being aware of multiple different kinds of information. Here are some of the major ones.

1. Registration with the right agency (or agencies) in each state

In the US, state payroll tax registration is required with each state in which you operate and hire employees. You may have to register with more than one agency per state, depending on what facet of payroll tax each one handles. You can find a list of state tax agencies here.

2. Inclusion of all necessary information

Registering for payroll taxes requires a company to submit many different types of information and documents. These can include:

• Employment Identification Number (EIN)
• State and/or local income tax ID numbers (when applicable)
• State unemployment tax ID number
• Employee information such as names, addresses, and Social Security Numbers
• Employment Eligibility Verification (I-9) forms
• Employee’s Withholding Certificate (W-4) forms
• State Withholding Allowance Certificate (when applicable)
• Workers’ Compensation Insurance ID number (when applicable)

Knowing what information and documents you need (or don’t) before you start registration helps avoid delays and other potential consequences, letting you start focusing on running your organization sooner rather than later.

3. Proper designation of workers

Workers are generally classified as either employees or independent contractors. Employees are those who must follow a company’s policies in terms of what work gets done and how it gets done. Independent contractors follow their own standards in terms of what and how work gets done to deliver a finished product.

Employees must have payroll taxes deducted, while independent contractors pay their own taxes. You must properly classify the people who work for you to know whether to withhold taxes from them or not. If you don’t, you can face severe penalties.

4. Awareness of wage and tax rates

There are certain elements of payroll that have set rates, minimums, or maximums. In the US, these include:

• Minimum wage
• Social security tax
• Unemployment tax
• Medical insurance (Medicare) tax
• Retirement savings plan contributions
• Health spending program contributions

You need to be aware of changes to these rates at a federal level and a state/local level, and promptly adjust your payroll system to factor them in.

5. Timely submission of taxes and paperwork

In the US, you have to pay taxes and file returns for them at both the federal and state level. The times at which you have to do this can be different, including for Medicare / social security (FICA) taxes and unemployment (FUTA) taxes. Make sure you’re aware of the deadlines for making deposits and filing returns or other paperwork, including what specific paperwork you need to submit.

6. Adequate retention of records

You also have to keep records of your payroll registration and activities — the latter, for a minimum of four years (though many companies keep them for six). This allows you to provide evidence that you are (and have been) compliant with a particular jurisdiction’s payroll tax regulations, should you be audited by that jurisdiction’s tax authorities.

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To expand on the points made above, here’s a quick payroll compliance audit checklist of 10 tasks you need to remember to do to stay compliant with your registration for payroll taxes. That includes tasks to get ready for and execute registration properly, maintain compliance once registered, and anticipate future compliance changes.

Preparing for and completing registration

1. Research which federal, state, and local tax agencies you have to register with (depending on where your employees and operations are located), and what kinds of taxes you have to pay to each of them
2. Find out the rates and limits of taxes, wages, and other payroll-related metrics (e.g. health benefits, retirement contributions) relevant to each tax agency you have to register with
3. Check whether each person who works for your business meets the federal/state/local definition of an employee or an independent contractor, and thus whether payroll-related rates and limits apply to them or not
4. Determine what other information, both about the company and its employees, is required to properly register with the appropriate tax authorities
5. Centralize all of your information related to payroll tax registration into a single system to make filing, reporting, and auditing easier
6. File registrations with the appropriate tax authorities in a timely manner

Ongoing registration compliance

7. Set up your payroll system to apply the authority-specified rates and limits, and make adjustments to these in a timely manner as necessary 
8. Deposit taxes and file tax returns with the appropriate agencies, paying attention to varying deadlines

Proactive compliance measures

9. Store payroll records for at least as long as required by tax authorities, as evidence of registration compliance in the event of an audit
10. Consult external information sources to become aware of upcoming payroll compliance changes before they’re officially implemented

Pro Tip

Download the full checklist here ensure you’re following all the necessary steps of payroll tax compliance.

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Payroll tax registration services are designed to handle the complexities of registering businesses with tax agencies across different jurisdictions. They provide points for consolidating a business’s payroll-related information, then applying it to the unique requirements of different tax agencies.

However, they can sometimes be costly, especially if they require hiring an attorney or accountant. Also, some will consider the job finished once the registration process is complete, but tax rates and other important compliance-related information can change after registering. Tax authorities expect you to adhere to these changes, even if your registration service doesn’t handle that for you.

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With the above information in mind, here are some things to look for to help you choose a payroll compliance software if you intend to use a third party to help with your payroll account registration.

1. Ease of setting up accounts with different tax agencies 

Payroll tax agencies in the US can differ between states, both in what they are called and (more importantly) in how they set the rules for how payroll-related transactions need to be carried out. You need a registration service that is able to centralize your payroll-related data and automatically conform to each different state’s payroll regulations, without you having to figure these out yourself.

2. Registration with Secretary of State offices

In some states, you’re required to register your payroll system with the Secretary of State office in addition to any applicable tax agencies. You also have to file annual tax reports with the SOS for that state. A payroll registration service should do this as well.

3. Waived registration fees

Registering your payroll system with all the appropriate tax agencies in a state can cause registration fees to pile up for you. A good registration service will cover some or all of these fees so you aren’t left with expensive surprises that put your business further behind. 

4. Management of tax agency communications

A good registration service will stick with you to help you maintain ongoing payroll compliance. One way it can do so is by organizing mail from tax agencies to your company, so you know which agency in which jurisdiction sent the mail. This helps you determine what actions need to be taken, with which agency, and by when.

5. Automated report tracking, creation, and submission

Tax agencies across states can also differ in terms of when taxes need to be deposited, and what paperwork needs to be filed when. So a good registration service will go the extra mile in tracking what payroll tax elements need to be submitted to which agencies, and by when (or even automate payroll tax registration).

It should also automatically document and organize information and activities related to payroll compliance, so you’ll have reports ready to go in case of an audit. Better yet, you can audit your own company ahead of time so you don’t have as much prep work to do for when an official audit is scheduled.

Let Middesk Tax Registration shorten your payroll compliance checklist

Middesk’s State Payroll Tax Registration tool can take many of the complexities out of properly registering for US payroll taxes. All we need is your business and employee information, and then we navigate the differences in state regulations so you don’t have to. That includes tracking and organizing deadlines and updates, as well as centralizing and organizing your payroll-related information so you’re ready for both new registrations and audits of current ones.

Contact us for a demo to see how we can reduce the length of your state payroll tax registration process from hours – or even days – to as little as 10 minutes.