Running payroll sounds straightforward until you realize it involves federal income tax withholding, state unemployment tax filings, wage calculations, and dozens of deadlines that shift from year to year. Miss one step and the IRS or Department of Labor may come knocking with penalties that dwarf the original oversight.
This comprehensive payroll compliance checklist walks you through everything US businesses need to cover for the 2025 and 2026 tax years. Whether you have two employees or two hundred, the principles remain the same: pay people correctly, withhold and remit taxes on time, and keep records that can survive an audit.
What Is Payroll Compliance?
Payroll compliance is the process of paying employees correctly while meeting tax, wage, and reporting laws in the US. It sounds simple, but the rules come from multiple levels of government and change frequently.
Payroll compliance refers to three main pillars. First, you must pay at least the required wage, whether that is the federal minimum wage of $7.25 per hour or a higher state or local rate. Second, you must withhold and remit the right taxes, including federal income tax, fica taxes, and state equivalents. Third, you must keep legally required payroll records for the right length of time, typically three to seven years depending on the document and jurisdiction.
Compliance is layered. Federal laws from the IRS and Department of Labor set the floor. State laws add income tax withholding, unemployment insurance, and sometimes paid leave mandates. Cities and counties may add local tax laws or their own minimum wage laws. A business with employees in multiple states answers to every jurisdiction where those employees work.
These obligations apply regardless of team size. A two-person startup paying the founders a salary faces the same core requirements as a multi-state business with dozens of hourly employees. The difference is complexity, not whether the rules apply.
The rest of this guide turns these rules into a practical, repeatable payroll checklist that owners and payroll admins can follow every pay period, quarterly, and annually.
Core US Payroll Laws You Must Build Into Your Checklist
This section offers a quick tour of the main US laws that should appear by name in a robust payroll compliance checklist. Think of these as the legal backbone of your process.
The labor standards act flsa, officially called the Fair Labor Standards Act, sets the federal minimum wage, overtime pay requirements, and recordkeeping standards. It requires employers to pay non-exempt workers at least time-and-a-half for hours worked over 40 in a workweek. The DOL recovered $244 million in back wages in 2023 for FLSA violations, so this law deserves prominent placement on your checklist.
The federal insurance contributions act, known as FICA, mandates Social Security and Medicare withholdings from employee wages and matching contributions from employers pay. For 2025, the employee share is 7.65% (6.2% Social Security up to the $168,600 wage base, plus 1.45% Medicare with no cap). Your checklist should include a yearly review each December to confirm the updated Social Security wage base.
The unemployment tax act futa, or Federal Unemployment Tax Act, funds unemployment benefits at the federal level. Employers pay FUTA at 6% on the first $7,000 of wages per employee per year, though most receive credits that reduce the effective rate to 0.6% when they pay state unemployment tax on time.
Federal income tax withholding rules come from the Internal Revenue Code. Your checklist needs to ensure you use current IRS tables from Publication 15 and 15-T, apply each employee’s W-4 elections correctly, and deposit withheld taxes on schedule.
The equal pay act prohibits wage discrimination based on sex for substantially similar work. A simple checklist question might be: “Have we reviewed pay across similar roles for unexplained gender gaps in the past 12 months?”
Beyond these core laws, owners often forget supporting local regulations that may apply. The Affordable Care Act requires applicable large employers with 50 or more full-time equivalent employees to offer coverage and file Forms 1094-C and 1095-C. The Consumer Credit Protection Act limits how much can be garnished from an employee’s paycheck for child support or other debts. I-9 rules require employment verification within three days of hire, with fines exceeding $2,000 per violation.
Treat this list as the foundation. Then check your own state’s labor department and tax agency for extra rules layered on top.
Step-by-Step Payroll Compliance Checklist
This is the heart of the article: a sequential checklist you can print or turn into a recurring task list in your payroll system or project management tool. Group items by lifecycle stage to stay organized.
Step 1: Register Your Business and Get IDs
Before you can pay employees, secure an Employer Identification Number (EIN) from the IRS. Register with your state’s revenue department and labor department for state income tax withholding and state unemployment tax act accounts. If your employees work in cities with local income taxes, register there too. Confirm workers’ compensation insurance requirements for your state, as most mandate coverage even for small teams.
Step 2: Set Up State Unemployment Insurance
Each state sets its own SUTA rates, often based on your industry and claims history. New employers typically receive a standard rate for the first few years. Record your assigned rate and the wage base it applies to. When your annual rate notice arrives in late December or early January, update your payroll software immediately.
Step 3: Collect and Store Employee Documents
Effective payroll management starts with proper onboarding documentation. For each new hire, collect Form W-4 for federal tax withholding, the appropriate state withholding form, Form I-9 for employment eligibility verification, and direct deposit authorization if you pay employees electronically. Verify Social Security numbers before running the first payroll. Store documents securely with limited access.
Step 4: Classify Workers Correctly
Employee classification is one of the highest-risk areas. Determine whether each worker is an employee or not an employee, meaning an independent contractor. For employees, determine whether they are exempt or non-exempt under FLSA. Review job duties, not just job titles. Exempt status requires meeting both a salary threshold (currently $844 weekly) and duties tests for roles like executive or professional positions. Misclassifying employees can trigger back taxes, penalties up to $25,000 per violation, and lawsuits.
Step 5: Run Accurate Pay Calculations Each Cycle
Every pay period, complete these items in order. Track time for all non-exempt staff using reliable methods. Calculate gross pay: for salaried employees, divide annual salary by pay periods; for hourly employees, multiply hours worked by the regular rate. Apply overtime pay at 1.5 times the regular rate for hours over 40. Deduct pre-tax items like 401(k) contributions and health insurance premiums. Then deduct post-tax items including garnishments. Withhold federal income tax, FICA, and any state or local taxes. Verify the gross-to-net calculation matches expectations before payroll processing.
Step 6: Issue Compliant Payslips
More than 30 states specify what must appear on an employee’s paycheck or pay stub. At minimum, include gross wages, itemized deductions, net pay, pay rates, hours worked, and year-to-date totals. Digital payslips are acceptable in most states as long as employees can access them easily.
Step 7: Remit Taxes on Schedule
Your payroll tax deposits follow a calendar set by the IRS. If your total tax liability exceeded $50,000 in the lookback period, deposit semi-weekly. Otherwise, deposit monthly. Mark these dates clearly. State and local payroll tax deadlines vary, so build a separate calendar for each jurisdiction. Late deposits trigger immediate penalties.
Step 8: File Quarterly and Annual Returns
Quarterly, file Form 941 to report withheld federal income tax and FICA. If your FUTA liability exceeds $500, deposit it quarterly. Annually, file Form 940 for FUTA, and send W-2 forms to employees and the SSA by January 31. For independent contractors paid over $600, file 1099-NEC by the same deadline. New 2025 rules also require 1099-K forms for gig platform payments over $600.
Step 9: Designate a Backup Payroll Contact
Compliance breaks down when the primary payroll person is unavailable. Name a backup who knows how to run payroll and filings. Document login credentials securely. Test the handoff at least once per year.
Federal Payroll Tax and Wage Items to Check
This section zooms in on specific federal tax and wage items that deserve their own line on your payroll checklist.
FICA: Social Security and Medicare
Social security tax and medicare taxes split evenly between employee and employer. The employee pays 6.2% toward Social Security up to the annual wage base ($168,600 for 2025) and 1.45% toward Medicare with no cap. The employer matches both amounts. federal state and local insurance contributions must be deposited according to your liability schedule. Add a December reminder to check the new wage base for the coming year.
FUTA: Federal Unemployment
Employers pay FUTA on the first $7,000 of each employee’s wages annually. The base rate is 6%, but employer contributions to state unemployment typically earn a credit up to 5.4%, reducing the effective rate to 0.6% in most cases. Deposit quarterly if your liability exceeds $500; otherwise, deposit with your annual Form 940.
Federal Income Tax Withholding
Tax withholding depends on each employee’s W-4 elections and the IRS withholding tables. Use the current version of Publication 15-T. If the IRS issues a lock-in letter restricting an employee’s withholding claims, your checklist should flag that employee for manual review each pay period.
FLSA Wage and Overtime Checks
The federal government agencies sets the floor at $7.25 per hour, but many states and cities have their own minimum wage laws that supersede the federal rate. Your checklist should confirm you are paying the higher applicable rate. For non-exempt employees, pay at least time-and-a-half for hours over 40 in a workweek. Remember that nondiscretionary bonuses must be included in the regular rate when calculating overtime pay.
Equal Pay Act Review
Add an annual checklist item: “Have we reviewed pay across similar roles for unexplained gender gaps?” Document the review and any adjustments made.
Affordable Care Act Obligations
If you qualify as an applicable large employer with 50 or more full-time equivalent employees, track hours carefully. File Forms 1094-C and 1095-C by the deadline. Document offers of health insurance coverage and employee responses.
State and Local Payroll Compliance Checks
Once federal rules are covered, state and local differences cause most day-to-day confusion. These deserve their own section in your payroll checklist.
Minimum wage laws vary widely. California’s rate exceeds $16 per hour in 2025, while Washington and New York also set rates well above the federal level. Some states require daily overtime or double-time pay after certain hours in a single day, not just weekly totals. Your payroll system must reflect the rules for each state where you have employees.
State income tax withholding adds another layer. Some states have no income tax at all, while others layer city or county taxes on top. Employees in certain Ohio and Pennsylvania municipalities, for example, face local income tax on top of state taxes. Collect the correct state withholding forms during onboarding.
State unemployment tax rates change year to year based on your experience rating. When you receive your annual SUTA rate notice, update your payroll settings immediately. Failure to record the correct rate leads to deposit errors that trigger audits.
Paid sick leave and paid family leave mandates now exist in many states and cities. Accrual rules, usage caps, and notice requirements differ significantly. Your payroll checklist should include a reminder to review these settings whenever you hire in a new jurisdiction.
Final paycheck rules also differ. Some states require immediate payment upon termination, while others allow until the next regular payday. Confirm the rule for each state where you have staff.
For businesses with multi-state teams, maintain a separate “state matrix” document that summarizes key differences. Review it at least annually or whenever you expand into a new state.
Internal Controls, Recordkeeping, and Audit Readiness
Strong internal controls and documentation protect your business if there is an IRS, DOL, or state audit. This section adds those safeguards to your checklist.
Retention Requirements
Keep payroll registers, time records, and tax filings for at least four years for federal purposes. FLSA requires three years for wage and hour records. Some states like New York require seven years. When in doubt, keep digital copies longer, provided they are stored securely.
Control Procedures
Add these controls to your checklist:
| Control | Frequency | Owner |
|---|---|---|
| Second-person review of payroll totals | Each pay period | Backup payroll contact |
| Written approval for pay rate changes | As needed | HR or finance manager |
| Sign-off for manual or off-cycle checks | As needed | Primary payroll lead |
Periodic Internal Audits
Schedule at least an annual internal payroll audit. Sample a few pay periods and verify gross-to-net calculations. Confirm that exempt employees still meet salary and duties tests. Match payroll tax deposits to filed payroll tax returns. Document any corrections made, including why the error occurred and how you updated the process to prevent repeats.
Data Security
Protecting sensitive data like Social Security numbers and bank details requires limited access, encrypted storage, and clear offboarding steps when payroll staff leave. Your checklist should include a quarterly review of who has access to payroll systems.
Common Payroll Compliance Mistakes to Watch For
Many owners make the same handful of payroll mistakes. Turn each mistake into a guardrail item in your checklist.
Misclassifying Employees as Contractors
A long-term “contractor” who works regular hours under direct supervision, uses company equipment, and has no other clients likely should be on international payroll. California’s AB5 law led to a $1.2 million settlement in 2022 when a tech firm misclassified 200 engineers. Review worker classifications quarterly.
Exempt vs. Non-Exempt Errors
Paying a salary does not make someone exempt. The role must meet both salary and duties tests under federal and state laws. DOL audits found overtime violations in 70% of cases reviewed, with average backpay of $1,200 per worker.
Missing or Outdated Forms
Running payroll without a current W-4 or using the wrong state form after an employee moves creates compliance exposure. Build a checklist item to verify employee records whenever an address change is reported.
Overtime Calculation Errors
Non-discretionary bonuses and certain commissions must be included in the regular rate before calculating overtime. Failing to do so leads to underpayment claims.
Timing Issues
Late tax deposits, late wage payments, and payrolls delayed over holidays without adjusting schedules all trigger penalties or complaints. Set calendar reminders for every deadline and adjust cutoff dates around holidays.
For each of these mistakes, add a practical fix: calendar reminders, standard onboarding checklists, or a quarterly review of classifications.
Best Practices for Maintaining Ongoing Payroll Compliance
A one-time checklist becomes outdated the moment tax law changes or you hire in a new state. These practices turn your checklist into a living process.
Set a formal payroll calendar covering pay dates, internal cutoffs, tax deposit due dates, and federal and state return deadlines. Review it each December for the coming year and adjust for holidays.
Assign clear ownership. Name a primary payroll lead and a backup. Make compliance management part of their role descriptions and performance goals.
Schedule periodic training when major laws change, such as new overtime thresholds or updated state leave requirements. Document attendance so you can demonstrate diligence if questions arise later.
Communicate regularly with employees about pay schedules, how to review pay stubs, and how to raise payroll questions. Employee satisfaction improves when people trust their paychecks, and early questions can help catch errors before they compound.
Use technology to reduce manual steps. Digital time tracking, electronic pay statements, and automated calculations from payroll software reduce transcription errors. But keep human review as a final checkpoint. Automation cuts errors significantly, but software misconfigures settings in roughly 15% of first implementations.
How Payrun Helps You Stay Payroll Compliant
If you handle payroll on top of many other responsibilities, you know how easy it is for one missed deadline or miscalculated rate to snowball into a costly problem. Payrun is designed to take the manual burden off your plate so you can focus on running your business.
Payrun automates core checklist items: calculating gross-to-net pay, applying current federal and state tax rates, and handling FICA and FUTA calculations without spreadsheets. The platform prepares and files key tax forms, schedules deposits, and gives you a clear calendar view of upcoming payroll tax deadlines.
For businesses with employees in multiple states, Payrun manages different state tax accounts, minimum wage rules, and leave requirements from one dashboard. You do not need separate systems or constant manual lookups to handle global payroll compliance across jurisdictions.
Features like onboarding templates, built-in checks for missing tax forms, and audit-friendly reports covering each payroll run reduce the common errors described earlier in this article. Maintaining accurate records becomes automatic rather than a scramble before each quarterly filing.
Treat your Payrun setup as the live version of your compliance checklist. Review your configuration at least once a year or whenever you expand into a new state, add new benefits, or change your pay structure. The platform updates for regulatory changes, so you spend less time tracking tax codes and more time on business growth.
Explore a demo or trial to see how much of your manual checklist can become automated, repeatable workflows within Payrun.
FAQs
How often should I update my payroll compliance checklist?
Review your checklist formally at least once per year, ideally in the last quarter, to capture IRS updates, new wage bases, and state law changes for the upcoming year. Also update it whenever you hire in a new state, add a new type of benefit, or change pay structure for a significant share of employees.
What size of business needs a formal payroll compliance checklist?
Even a single employee on payroll triggers most core obligations, so a written checklist is useful from the first hire. As your team grows, the checklist becomes more important because the number of pay scenarios, states, and benefits increases, raising the risk of costly non-compliance.
Can I manage payroll compliance with spreadsheets alone?
It is technically possible for very small teams, but manual spreadsheets increase the risk of errors when tax regulations, caps, or employee data change. Using specialized payroll software like Payrun to handle complex calculations and filing taxes is safer, while a simple high-level checklist ensures human review and sign-off.
What should I do if I discover a past payroll compliance error?
The first step is to quantify the issue by reviewing affected pay periods and employees, then correcting underpayments and filing amended payroll tax returns when needed. Document the root cause and update your checklist so the same gap is less likely to recur. For larger exposures, consult a tax or employment attorney for tax advice.
How long do I need to keep payroll records in the US?
Federal payroll tax compliance records should be kept for at least four years, and FLSA wage and hour employee records for at least three years. Some states require longer retention. When in doubt, keep digital copies longer, provided they are stored securely with limited access.
