Starting a business is exciting… but also filled with tiny, critical details that can be challenging (and frustrating) to manage. 

From tracking overtime or minimum wages to submitting payroll taxes and being prepared for audits anytime, it's a lot for any small business owner to keep track of on your own — especially when it feels like those requirements (or subsequent deadlines) change every time you finally get them straight.

If you’re managing too many processes, it becomes very easy to miss new mandates or regulation and face big consequences before even knowing what you did wrong. 

Multiple states bumped minimum wages this year and expanded paid leave, and we can expect to see more updates all year long. but that’s not all! Changes are happening on the federal level, too, and small businesses that don't make adjustments are wide open to violations.

Thankfully, this doesn’t have to be you! 

This article will guide you through the specifics of seven state and federal payroll regulations you need to know as a small business owner. We’ll also offer helpful tips to audit your current payroll process and make sure you stay compliant this year and beyond.

Your Annual Payroll Regulations Guide 

Staying compliant with payroll regulations is crucial for every business, but especially those on the smaller side–considering their limited budgets and resources. Handling payroll properly shows employees you value their hard work while also helping you avoid potential lawsuits or fines that could damage workplace culture and your bottom line.

Don’t have the in-house resources to manage payroll and keep up with compliance regulations? Consider partnering with an experienced, trusted payroll provider who can advise on federal and state laws, ensuring your processes are legally compliant. By outsourcing payroll, you’ll have time to refocus on your business–while maintaining compliance standards, and your  business’s reputation.

It’s critical to compensate your team fairly — and having trusted payroll counsel builds trust with staff and offers peace of mind for everyone. At ConnectPay, we make sure you understand federal and state regulations and stay compliant with them so your payroll runs smoothly month after month.

7 Crucial State and Federal Payroll Regulations (+ Tips To Stay Compliant) 

When building a solid team, giving folks adequate time off shows you care about their health and well-being. But paid leave rules vary depending on where you are. Figuring out what applies to your small business is key to staying compliant and letting your team know you've got their backs.

1. Minimum Wage 

The federal minimum wage is currently $7.25 per hour in most states, but individually, states can choose to set a higher minimum wage rate.For example, New York's cost of living is far higher than in rural areas, so its minimum wage ranges from $13.20 to $16 per hour, depending on the size of the company and the region it’s located in.

Failing to meet required minimum pay rates leaves you vulnerable to employee complaints and Department of Labor audits. The good news is that staying compliant is manageable with reminders to review wage data. And remember — fair pay fosters goodwill with staff and positions your business as an ethical workplace.

Depending on your state, and the size of your business, you’ll be required to, pay either the  federal or state minimum — where you do business. With states frequently updating rates, checking federal and state minimums at least annually is essential to guarantee compliance

2. Overtime Pay 

Federally, you must pay employees 1.5 times their regular hourly rate for anything beyond 40 hours a week. Keep in mind, exempt and non-exempt employees may have different requirements.

Some exempt employees include:

• Administrators
• Executors (those who have decision-making roles in your business including the CEO)
  

Non-exempt employees include:

• Interns
• Servers
• Retail associates

Additionally, some states mandate daily overtime — time-and-a-half pay for more than eight to twelve per day. Accurately tracking employees' time lets you be sure you calculate any overtime wages they've earned. And since overtime gets expensive quickly, consider capping employee hours before overtime limits to protect your bottom line. 

Time tracking also lets you monitor potential overwork that could lead to team burnout your small business can’t afford. Keep overtime minimum and infrequent to protect your team by utilizing time ceilings (with occasional exceptions as needed). Your employees’ personal time matters, too!

3. Payment Methods and Frequency 

Each state regulates how often you have to pay employees and what payment types are acceptable. While typical schedules are weekly, biweekly, or monthly, some states mandate more frequent payments. For example, regulation in New Hampshire requires business owners to pay manual workers every week. States can also restrict certain payment types — like pay cards — and may require you to get employee consent or disclose associated fees if you want to use this option. 

Consult your state labor department to ensure compliance before you set pay schedules and choose the best way to compensate your team. Then, clearly outline these expectations in an offer letter or workplace policies to keep people from getting confused down the road. 

4. Payroll Taxes and Tax Forms 

You may think you can cross payroll off the to-do list once the direct deposit hits or the paychecks go out. But as a business owner, you must also calculate, file, and remit payroll taxes to state and federal agencies. These calculations include income tax, Social Security, Medicare, and unemployment tax. And come tax season, it’s up to you to provide annual forms like W-2s and 1099s to each employee/contractor and file copies with the appropriate agencies.

It can be extremely challenging to stay on top of all these things! What’s the easiest way to automate payroll tax workflows? Use a hassle-free payroll software. When you work with theright small-business-focused payroll provider, like us at ConnectPay, we can seamlessly handle payments, withholdings, and filings behind the scenes so you avoid penalties and provide a smooth tax season for your employees.

5. Paid Leave (Family Leave and Sick Time) 

Regulations around paid family leave and sick time differ widely between states. Some use payroll deductions to fund paid family and medical leave programs. Others require you to provide a minimum number of sick days for your team to draw from. And, parental leave laws vary across the board — so check your state statutes before assuming it falls under family or sick time.

As a small business owner, what does or doesn't apply to your business is based on your location, number of employees, and other factors. If you have staff in multiple states, consider offering the most generous state-mandated leave to all employees to simplify compliance and retain top talent through strong benefits. 

And don’t forget to consult your internal HR resources and state labor departments to confirm if you must withhold leave deductions or provide accrued time. Understanding state-specific paid leave laws takes diligent research upfront, but it can save you from running into major issues as your business grows.

6. Workers’ Compensation Insurance 

Workers' compensation lets you provide medical and lost wages to employees injured on the job. It's a federally managed program carried out by the states: nearly every state requires that you carry a workers' comp insurance policy with minimum coverage. However, the policies themselves differ. Some states allow alternative plans, while others mandate standard coverage. 

With complex state-by-state requirements, partnering with an insurance broker or payroll provider can help you navigate your company’s unique compliance needs. They can secure a compliant policy, manage relevant paperwork, and ensure you take proper steps if an employee needs to file a claim. Handling workers' comp demonstrates you care about employee well-being and workplace safety. And the right guidance guarantees no gaps in your state-mandated protections.

7. Recordkeeping 

Employers in all states must keep payroll records for at least three years. This federal mandate helps the Department of Labor monitor companies' compliance in each state. So, properly saving and archiving records reduces your risk of getting audited and gives you evidence if a claim arises. But physical documents take up lots of physical space, posing a significant security risk to your business.

Solve your recordkeeping problems and avoid potential penalties by using integrated payroll software. Payroll software digitally securely stores wage, tax, and leave-related information so your records remain intact, organized, and accessible without creating additional work for you or your team.

Navigate This Year’s Payroll Regulations with the Right Payroll Partner 

Staying on top of evolving payroll regulations you must know is tedious for any business owner (especially in multiple states!). While this list can help you navigate them this year, an experienced payroll provider can manage these regulations for you so you can focus on your business. 

Consider ConnectPay. We connect you with local CPAs who can advise you on state laws, secure compliant Worker's Compensation policies, calculate complex taxes, and more so you can take advantage of every mandate. 

If managing changing rules feels daunting, schedule a free Payroll Tax and Compliance Review. We’ll evaluate your current processes and provide suggestions to streamline payroll and improve compliance.