As the workforce becomes more mobile and global, payroll compliance is growing increasingly complex. From evolving worker classifications to multistate tax obligations, companies must stay ahead of regulatory changes to avoid costly mistakes and ensure smooth operations.
Our payroll pros outline these key areas to focus on within your organization to help you better manage your payroll and maintain compliance:
Regulatory changes that could affect payroll
Paid family and medical leave (PFML) programs and state disability programs (SDI) are both becoming more common, offering paid leave for various qualifying reasons, which can vary by state. The nuances around how these programs are designed and how contributions are determined depend on the state. However, IRS Rev. Rul. 2025-4 provides guidance on the federal income and employment tax treatment of contributions and benefits paid under state-administered PFML programs and addresses reporting requirements.
Worker classification guidelines
Proper worker classification is critical for payroll tax compliance, yet it remains a complex issue for many businesses. The IRS simplifies its guidance into three main factors: behavioral control, financial control and the relationship between parties. These help determine whether a worker should be treated as an employee or an independent contractor. While the rules are clearer, certain professions still require a case-by-case analysis.
Complicating matters, different agencies, including the IRS, Department of Labor and state labor departments may apply different standards. Some states use the ABC test, which requires workers to meet three strict criteria to qualify as independent contractors.
With some ambiguity in worker classification guidelines, errors can occur. However, the IRS has created multiple programs that employers can consider to mitigate exposure.
- Voluntary Classification Settlement Program (VCSP): Allows businesses to reclassify workers with reduced penalties if they meet specific criteria.
- Section 530 Relief: Protects companies that have consistently treated workers as contractors and had a reasonable basis for doing so.
- Classification Settlement Program: Available during IRS audits to resolve classification issues.
- Early Appeals Referral: Lets businesses contest classification decisions during an audit.
Employee location differences
With remote and hybrid work becoming the norm, nonresident income tax withholding remains a major challenge for many companies. Generally, employers must withhold state income tax based on where services are performed. However, exceptions exist such as de minimis thresholds, which exempt withholding if an employee works only a limited number of days or earns below a certain amount in a state. When managing multi-state tax compliance, here are some key considerations:
- Telecommuting across state lines, which can trigger unexpected tax obligations.
- State-specific withholding rules, which differ widely.
- Voluntary Disclosure Agreements (VDAs), which help companies proactively resolve past noncompliance with reduced penalties.
- Professional guidance, which is often essential to navigate these rules and develop effective policies.
- Reciprocity agreements between certain states allow employers to withhold only the resident state’s tax if the employee submits a certificate of nonresidence.
How we can help
As payroll reporting becomes increasingly complex, it’s essential to partner with a provider that understands your business and keeps you compliant. We understand the complexities of local, state and federal compliance laws that impact your business. We take on the back-office tasks of accurately calculating and depositing your payroll taxes, as well as remitting your tax filings on time. Contact us to learn more.
