A Complete Guide to Payroll Compliance in 2025

Every year brings the potential for new employment laws. And legislation that affects payroll is no exception.

For employers, failing to ensure payroll compliance opens the door to issues like:

• costly noncompliance fines
• untimely audits and other penalties
• payroll mistakes

Compliant payroll may seem like a tall order because it is. At the same time, compliance is necessary to ensure the long-term success of a business and fair, equitable treatment for its employees.

Let’s dive into how payroll compliance works, some of the common laws that impact it and what organizations should do to strengthen their regulatory processes.

What is payroll compliance?

Payroll compliance is how businesses adhere to laws and rules that relate to payroll and payroll taxes. Organizations need to comply with legislation on the local, state and federal levels to sustain their operations.

Consequences for failing to comply exist at every level. But regardless of a penalty’s severity, companies that prioritize payroll compliance protect the processes that matters most to their people.

Who is responsible for maintaining payroll compliance?

While broad compliance falls on everyone in an organization, HR and accounting are generally responsible for payroll. These departments should understand how payroll compliance works, but they should also rely on software, such as self-building payroll tech, to automate the process.

Ultimately, an employer is liable if violations occur. If a company is uncertain about its compliance, it should always consult a licensed legal professional.

Laws and regulations affecting payroll compliance in 2025

Multiple factors influence payroll compliance. Businesses should keep these common laws, rules and guidance in mind as they build, adapt and tighten their strategies.

Fair Labor Standards Act (FLSA )

FLSA sets the following for employees working in the private sector or for local, state or federal governments:

• minimum wage
• overtime pay
• record-keeping
• youth employment standards

While some exemptions exist, most employers must adhere to FLSA.

Minimum wage

A minimum wage is the lowest hourly rate businesses must pay employees. In 2025, the federal minimum wage is $7.25 per hour. Keep in mind a state’s minimum wage may override this, so it’s important for companies to comply with the exact requirements of the jurisdictions where they operate.

Overtime pay

Overtime pay refers to a higher rate employers must pay hourly employees for working beyond normal working hours. Generally, “normal working hours” refers to anything over 40 hours a week.

Federal overtime

Federal overtime requirements state that nonexempt employees working more than 40 hours in a seven-day workweek must be paid a rate of 1.5 times their regular rate of pay. For example, if a nonexempt employee’s regular rate is $15 per hour, and they work 45 hours in a workweek, then 40 of those hours would be paid at $15 per hour and five of those hours would be paid at $22.50 per hour.

State overtime

Some states have their own overtime laws, which may differ from the FLSA. For example:

• In California, non-exempt employees are entitled to overtime pay at 1.5 times their regular rate for hours exceeding eight in a workday or 40 in a workweek. Employees who work more than 12 hours in a single day must receive double their regular rate for those hours.
• In Colorado, non-exempt employees are entitled to overtime pay at 1.5 times their regular rate for hours exceeding 12 in a workday, 40 in a workweek or for working 12 consecutive hours without a five-hour rest period.
• In Oregon, non-exempt employees are entitled to overtime pay at 1.5 times their regular rate for hours exceeding 40 in a workweek, as well as for any hours worked on the seventh consecutive day of work.

IRS guidelines

The IRS enforces several payroll taxes, including:

• federal income tax
• Social Security taxes
• Medicare taxes

While employers are required to withhold these taxes for their workforce, they are determined by what an employee earns and the data provided on their Form W-4.

State income tax laws

In addition to federal taxes, each state — and even certain cities — maintains its own payroll tax laws. Since exact guidance varies between locations, businesses should verify the exact rate with the relevant local agencies.

Family and Medical Leave Act (FMLA)

FMLA allows certain employees to take unpaid, job-protected leave for family and medical reasons. While “unpaid” may make some assume it has little to do with payroll, that’s not the case.

FMLA allows affected workers to still receive their group health insurance benefit as if they had not taken leave. Plus, employees who use FMLA may be entitled to:

• conditional pay increases
• bonuses
• other payments

For this reason, businesses should ensure they don’t omit employees who use FMLA leave from payroll entirely.

Other special pay types

Employers in some states may be required to pay employees for certain types of special pay, including on-call pay, reporting-time pay and meal break penalty pay.

On-call pay refers to the compensation employees receive for being available to work outside of their regular scheduled hours, even if they don’t actually perform any work. This type of pay is often required by law in certain situations, such as when an employee is required to be on standby or carry a work pager or phone.

Reporting-time pay is a type of wage that compensates employees for reporting to work, only to be sent home without working their full shift. The rules vary by state and industry, but here’s a breakdown of the requirements in four states:

• California: Employers must pay employees at least half of their scheduled hours, up to a maximum of four hours.
• Connecticut: Retail and hospitality industry employees are entitled to at least four hours of pay at their regular rate.
• District of Columbia: All employees, regardless of industry, must receive at least four hours of pay if they’re given less than four hours of work.
• New York: Employees (excluding those in the hospitality industry) are entitled to at least four hours of pay, or the number of hours in their regular shift, whichever is less.

In California, employees must receive a 30-minute unpaid meal break after five hours of work. If this break isn’t provided, employers owe the employee one hour of pay.

Payroll tax codes

Employers are also required to deposit and report federal employment taxes, which include:

• federal income tax
• Social Security taxes
• Medicare taxes
• federal unemployment tax

These taxes may be paid by both the employer and the employee, or solely by the employer, depending on the specific payroll tax.

Federal income tax (FIT) withholding

As an employer, you’re responsible for withholding federal income tax from your employees’ paychecks. The amount you withhold depends on two key factors:

• the employee’s taxable income and the corresponding percentage from the IRS income tax tables
• the information the employee provides on Form W-4

If the IRS determines that an employee doesn’t have enough withholding, they’ll alert you to increase the amount withheld through a lock-in letter. This letter will:

• inform you of the specific rate to withhold from the employee’s wages
• notify you that the employee didn’t have enough income tax withheld due to filing exempt or claiming too many allowances

You’ll receive a copy of the lock-in letter, which you must give to the employee within 10 business days. If the employee exits the organization and returns to work within a year of receiving the letter, you should start withholding income tax from their wages based on the rate specified in the letter.

State income tax (STI) withholding

If your state taxes residents’ income, you’ll need to withhold state income tax from your employees’ paychecks. The amount you withhold will depend on the employee’s gross taxable income and the information they provide on Form W-4.

Federal Insurance Contributions Act (FICA)

FICA taxes fund Social Security and Medicare benefits. Both you and your employees contribute to FICA taxes, which include:

• Social Security Tax (6.2% of FICA taxable income)
• Medicare Tax (1.45% of FICA taxable income)

Together, these taxes total 7.65% of the employee’s FICA taxable income. As the employer, you’re responsible for withholding and remitting the employee’s portion of FICA taxes. Keep in mind that:

• Social Security Tax only applies to the first $176,100 of an employee’s earnings.
• Medicare Tax has an additional 0.9% surtax for single filer employees earning more than $200,000 and $250,000 for joint filer employees.

Federal Unemployment Tax Act (FUTA)

FUTA generates money for national unemployment programs through taxes imposed on nearly any business with more than one worker. Signed under the Social Security Amendments of 1939, FUTA has been a compliance requirement for organizations nationwide for nearly a century.

Notably, FUTA taxes fall on employers, not their staff. However, FUTA rates must be derived from employees’ wages. The current FUTA tax rate is 6% of the first $7,000 a business pays to an employee each year.

State Unemployment Tax Act (SUTA)

SUTA — also known as “state unemployment insurance” (SUI) — is a required payroll tax that’s placed into a state’s unemployment fund to pay benefits to employees who separated from their companies. Generally, employers cover the cost, but some states, like Alaska, New Jersey and Pennsylvania, also require employees to contribute. The amount owed varies depending on the number of employees and their salaries.

Read our blog post to verify the current SUTA tax rates in the state(s) where your business operates.

Paid Family Leave and Disability Leave tax payments

State laws on Paid Family and Medical Leave (PFML) and Disability Benefits Leave (DBL) establish financial contribution obligations to support the state insurance system. These contributions are typically made through state tax payments. The funding model varies by state. For example, California uses employee paycheck withholdings, while New York relies on employer contributions, sometimes with partial reimbursement through payroll deductions.

Workers’ compensation payroll costs

Workers’ compensation insurance is a mandatory coverage for employers in all U.S. states except Texas, providing benefits such as wage replacement, medical treatment and vocational rehabilitation to employees injured on the job. Premiums are calculated as a percentage of employees’ wages and influenced by factors like industry, job duties and work location. Failure to provide coverage can lead to costly lawsuits, while compliance can help better prepare employers to respond to work-related injuries and illnesses.

What employee classifications should businesses know for payroll compliance?

When it comes to payroll compliance, it’s not enough to understand the bare minimum of a law. Employers should also identify which employees a tax or rule affects. Keep the following IRS documents and statuses in mind.

I-9 vs. W-2

The Form I-9 is used to confirm identity and eligibility to work. While the I-9 doesn’t influence taxes, the W-2 reflects how much an employee earned in a year, as well as the:

• amount of taxes withheld from their checks
• benefits they received
• other relevant information

Income tax exempt

Exempt employees are individuals who aren’t required to pay certain taxes. Tax exemptions could apply to employees who don’t meet a certain income threshold or those who are executive, administrative, professional, computer or outside sales employees.

Payroll tax non-exempt

Non-exempt employees, as the status implies, still have to pay taxes as required by applicable laws. While most people fall into this category, employers shouldn’t assume.

Another way of defining non-exempt employees is those who do qualify for the federal minimum wage and overtime pay. Remember, employers should always consult a licensed professional if it’s not clear who among their employees may be exempt from certain taxes.

Equal pay laws

Employers must comply with various laws and regulations to ensure fair treatment and equal pay for employees.

Equal Pay Act

The Equal Pay Act of 1963 prohibits pay disparities based on sex. In other words, the law ensures all employees in the same organization earn equal pay for equal work.

While the Equal Pay Act doesn’t require a specific tax or deduction, it does enforce fair and equitable payroll practices. As such, it’s crucial for businesses to address bias and discrimination before it leads to noncompliance.

Protected speech involving pay

The National Labor Relations Act (NLRA) protects employees from unfair labor practices and ensures their rights to collective bargaining and self-organization. Under Section 7, employees have the right to form unions, negotiate with employers and engage in concerted activities, which is when two or more workers take action to improve their terms of employment or working conditions.

Employers are prohibited from interfering, restraining or coercing employees in exercising these rights. Examples of employer violations include threatening or bribing employees during union drives, spying on union activities and firing employees for participating in collective bargaining.

Payroll regulations designed to promote equality

In 2024, women earned an average of 85% of what men earned, according to a Pew Research Center analysis of median hourly earnings of both full- and part-time workers. Pay equity and transparency laws seek to close the wage gap between men and women. And some states, such as California and Colorado, have implemented laws to address this issue, including requirements for equal pay for similar work, transparency in job postings and fines for non-compliance.

Pay transparency laws

Pay transparency is the practice of openly sharing pay information with employees and potentially the public. In many states, legislation seeks to make it a requirement for certain employers.

State transparency laws

These 14 states currently require (or will require) pay transparency in 2025:

• California
• Colorado
• Connecticut
• Hawaii
• Illinois
• Maryland
• Massachusetts
• Minnesota
• Nevada
• New Jersey
• New York
• Rhode Island
• Vermont
• Washington

What are the deductions in payroll compliance?

Most laws that impact payroll compliance will come paired with a specific deduction. Consider these common examples.

Benefits

Due to laws like COBRA, HIPPA and more, organizations should carefully maintain, audit and even automate their benefits administration. Additionally, the Affordable Care Act (ACA) requires employers to offer health care coverage after hitting a certain head count.

While these laws don’t establish a universal benefits deduction, businesses must still adhere to them to ensure payroll compliance.

Garnishments

Not every deduction is set by a widespread law. A garnishment is the process in which an individual’s wages must be withheld by their employer to satisfy a debt or another financial obligation.

Garnishments, even those resulting from judgements against a specific employee, can still result in an employer being held liable for the full amount and citations if not followed.

Payroll taxes

A payroll tax is a portion of an employee’s earnings that are withheld by an employer to fund local, state and federal programs. Businesses that don’t deduct the appropriate amount may face fines, audits or other legal penalties.

What technology should businesses use to ensure payroll compliance?

Payroll compliance may seem complex, but the right HR management tools help businesses manage an otherwise taxing manual process. Organizations should consider using tech — ideally available in a truly single HCM software — to reduce their regulatory burden.

Record-keeping requirements

Businesses should always be prepared to prove their compliance with laws like the Equal Pay Act and potential government audits. The best tools make it easier for businesses to:

• conduct self-audits
• identify and address potential noncompliance
• provide any required reports or documentation
• respond accurately and timely to requests

In tandem with document management software, companies should consider an employee self-service experience that seamlessly moves data from one tool to the next. Doing so ensures information is only entered once to minimize errors and data loss.

Transparency and data protection

When it comes to payroll compliance as it relates to employees, organizations should prioritize two things: security and accessibility. The HR tech a company uses should make it easy for employees to view and manage every component that affects their pay, including taxes, garnishments and other deductions.

At the same time, workforce software should be secure, as vetted by a legitimate agency. For example, the best providers should be ISO– and SOC-certified, while also maintaining clear and effective policies around:

• risk mitigation
• infrastructure and access control
• data, product, endpoint, application, network and corporate security

Direct deposit allocations

Direct deposit is one of the most common and convenient methods for employees to receive their pay. This process deposits a worker’s earnings into one or more valid bank accounts.

To help ensure compliance, businesses should invest in payroll software that simplifies this process by allowing employees to easily manage and modify their direct-deposit information. Likewise, this tech should constantly be capable of paying employees on time and accurately.

What are the risks of noncompliant payroll?

If detrimentally harming an employee’s financial livelihood wasn’t enough, businesses can also endure numerous legal consequences for noncompliant payroll. In fact, more than half of HR professionals report their organizations have faced a compliance warning or compliance audit in the last five years, highlighting the significant risks associated with noncompliance.* The financial and reputational damage caused by noncompliance can also lead to increased employee turnover, as dissatisfied employees may seek alternative employment opportunities where their compensation and benefits are accurately and fairly administered.

Penalties

Employers who neglect their payroll tax obligations or other requirements can wind up on the hook for costly government-administered fines. Consider this: Businesses that are over 15 days late to deposit their IRS payroll taxes may receive a penalty worth 10% of the delinquent taxes.

Litigation risks

Payroll noncompliance can create an opportunity for costly lawsuits and their subsequent settlements or judgements. For example, Alabama steelworkers were awarded $13.2 million dollars in 2022 for a legacy of unpaid overtime.

Payroll compliance: FAQ

Do payroll compliance laws apply to all businesses regardless of size?

Most businesses are covered by some law related to payroll compliance. But what applies to them may differ based on their exemption status and company size. For instance, the ACA only applies to organizations that employ 50 or more full-time employees (including the full-time equivalent employees based on the hours they work).

Do all states have unemployment insurance requirements?

Yes, and each one maintains a separate unemployment insurance program. However, not every state requires employers to pay SUTA taxes. Alaska, New Jersey and Pennsylvania administer taxes to employees, too.

What is the risk of miscategorizing an employee as an independent contractor?

Misclassifying an employee as an independent contractor — and thus paying them incorrectly — can result in significant fines and penalties. Read our blog post to learn how a new Department of Labor definition broadens the legal meaning of an employee, impacting the status for millions of people.

How can Paycom help my organization remain compliant?

With our self-building payroll tech and comprehensive government and compliance tools, Paycom simplifies your organization’s compliance challenges — all in a single software.

Beti®, our employee payroll experience, self-starts each pay period, pulling live data on:

• employees’ hours worked
• approved expenses
• compensation changes
• relevant deductions and taxes
• and more

In turn, this makes it easier for HR to bolster compliance and focus on value-adding initiatives.

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*A March 2023 survey conducted by Pollfish and commissioned by Paycom of 600 HR professionals.