Ensuring payroll compliance in 2024: What’s new?

Maintaining payroll compliance is a must for accounting departments, but it’s often easier said than done. That’s especially true whenever new changes come about, and 2023 was a year rife with new payroll regulations, trends, and initiatives.

From the implementation of SECURE 2.0 to new IRS enforcement initiatives, there’s a lot of payroll administrators need to know. That’s why we’ve compiled this summary of one of our recent webinars that Alice Gilman, Esq, hosted.

In it, she breaks down all the new payroll compliance changes affecting payroll administration in 2024, including post-pandemic trends that don’t appear to be going anywhere anytime soon.

Without further ado, here’s step-by-step guidance for achieving payroll compliance in 2024.

SECURE 2.0: Important Changes to Know About

The Consolidated Appropriations Act of 2023 was signed into law in December 2022, and it’s collectively referred to as SECURE 2.0 – an update to the SECURE Act from 2019.

It provides provisions aimed at improving employee retirement outcomes and makes starting 401(k) plans more attractive and beneficial for employers – even those with 50 or fewer employees.

How does it do that?

SECURE 2.0 encourages employers to provide retirement plans by offering tax incentives and credits.

For example, under the original SECURE Act, businesses with fewer than 100 employees could receive a tax credit for up to 50% of their administrative costs if they offered retirement plans to their staff.

SECURE 2.0 bumps the tax credit up to 100%, which applies to businesses with 50 or fewer employees (other credits apply to companies with 51 to 100 employees).

Here are the employer plans that qualify for the credit:

• 401(k) plan
• SIMPLE plan
• Simplified Employee Pension (SEP)

The IRS has begun to provide guidance on SECURE 2.0 for de minimis financial incentives and long-term part-time employees.

De Minimis Financial Incentives

Employers can now provide de minimis (minimal) financial incentives to encourage employees to sign up for their 401(k) program. It went into effect for plan years beginning in 2023, and it’s only available for employees who aren’t currently enrolled in your 401(k) plan.

If the incentive is at most $250, it will qualify as de minimis (meaning you don’t have to report on it). You can also provide the financial incentives in installments, but that’s contingent on an employee continuing to defer (i.e., not signing up for your 401(k) plan).

These incentives are fully taxable and are subject to W-2 reporting.

Long-term part-time employees

SECURE 2.0 brings changes to the way employers qualify long-term part-time employees.

Under SECURE 1.0, a long-term part-time employee was someone who worked 500 hours during three consecutive 12-month periods.

However, SECURE 2.0 lowers the eligibility requirement, as workers only have to put in 500 hours during TWO consecutive 12-month periods.

That means all part-time employees who clocked 500 hours or more for two years now qualify as long-term part-time employees.

Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) was a tax credit issued by the IRS during the COVID-19 pandemic. Its purpose was to aid businesses that continued to pay their employees despite having some or all of their operations suspended due to the mandated lockdown period.

However, this particular credit was victim to extremely aggressive marketing from less-than-trusted tax professionals. There were also lots of scam promotions promising companies ridiculous credits and returns.

As a result, the IRS was flooded with loads of improperly claimed 941-X forms, causing them to issue a moratorium for new ERC claims that began on September 14, 2023.

The IRS is now encouraging businesses that filed ERC claims to re-examine their eligibility and, if necessary, withdraw the claims via the ERC Withdrawal Program. They can also apply for the Voluntary Disclosure Program to repay incorrect ERC claims.

U.S. Supreme Court Cases

Currently, two major Supreme Court cases involving payroll pose some interesting questions for accounting professionals. The first case, Moore vs. U.S., No. 22-22-800, is a tax case dealing with the Sixteenth Amendment of the Constitution. In a nutshell, it questions Congress’s ability to tax unrealized income without apportionment among the states. It’s a massive case that can change the tax code as we know it.

Why is that?

It’s because the case is essentially about how Congress defines and taxes income. Traditionally, Congress only taxes realized income, and the central question is whether there’s a realization clause in the Sixteenth Amendment.

The other case, Loper Bright Enterprises vs. Raimondo, No. 22-451; Relentless Inc. vs. Department of Commerce, No. 22-1219, has to deal with Chevron’s deference and Congress’s responsibility for enacting vague laws or feature little-to-no consideration.

For example, Congress included the provision of de minimis financial incentives in the SECURE 2.0 Act. Yet, it needed to have defined what qualified as de minimis (in other words, they didn’t provide a number for how small a minimal payment would be). When asked what de minimis would be, Congress enacted Chevron deference, where they defer to the affected institution’s interpretation of the law.

In this case, the IRS determined that anything under $250 would qualify as de minimis. The case explores whether Congress should overrule or at least clarify the statutory silence included in Chevron’s deference.

New Payroll Regulations

Now, let’s take a look at new regulations affecting payroll administration.

Tax Regulations

E-filing corporate and partnership returns

• S corps, C corps, and partnerships with at least 100 partners must e-file their income tax returns if required to file at least ten returns of any type during the calendar year ending with or within the entity’s taxable year. This includes income tax returns, Forms 941 and 940, and information returns.
• Religious and other types of waivers are available. Mail your requests for e-filing waivers to Internal Revenue Service Ogden Submission Processing Center, Mail Stop 1057, Ogden, UT, 84201. You can also fax e-filing waiver requests to 877-477-0575.
• The IRS e-help desk phone number is 866-255-0654.

Self-correct de minimis errors

• IRS and SSA computers don’t track de minimis errors, so you can voluntarily correct them. If you’re required to e-file your returns, ensure that you e-file the corrected return.

Labor Regulations

New FLSA (Fair Labor Standards Act) regulations on worker status effective March 11, 2024

New FLSA regulations formalize the 6-part’ Economic Realities’ test that the Supreme Court began developing in the 1940s. The regulations update the language from the original test to reflect modern times instead of the industrial economy of yesteryear. The purpose of the 6-part test is to determine if a worker is an employee under FLSA or an independent contractor who works for themselves.

1. Opportunity for profit or loss depending on managerial skill. This refers to whether the worker can earn profits or incur losses through independent effort and decision-making. If the worker has the power to negotiate their pay and hire other workers, they’re an independent contractor. If they have these opportunities but require permission from the employer first, they’re an employee.
2. Investments by the worker and the potential employer. This factor deals with whether the worker makes investments that are entrepreneurial or capital in nature. If they do, they’re independent contractors; if not, they’re employees.
3. Degree of permanence of the work relationship. This refers to how permanent a worker’s employment status is with an employer. If the work is sporadic or project-based (and if the worker has the freedom to take on other jobs of a similar nature), they’re a contractor.
4. Nature and degree of control. As the employer, are you in charge of hiring, firing, scheduling, and pay rates? If so, then you have employees, not contractors.
5. Extent to which the work performed is an integral part of the employer’s business. How crucial is the work being done to your organization? If it’s an essential part (i.e., your business can’t function without it), the worker is an employee. If the work is not central to your work, it’s independent contract work.
6. Use of skill and initiative. This factor looks at the worker’s skills. Does the worker rely on the employer for training, or do they acquire work based on existing skill sets that they acquired on their own? If the answer is the latter, they’re considered an independent contractor.

Post-Pandemic Payroll Trends

The COVID-19 pandemic changed how professionals work forever, and payroll wasn’t excluded from the fun.

Here are some post-pandemic trends that persist to this day.

Hybrid and Remote Work Schedules

The pandemic introduced remote work to America, quickly becoming the new norm for many organizations. However, remote work schedules provide some challenges when taxing income. In particular, the nexus (the connection between your business and a taxing jurisdiction) is a bit complicated.

Here’s how it works:

• Withhold income tax for the state where the employees work (i.e., where the business is located).
• For hybrid employees, withhold income tax for both states and pay unemployment taxes to the state where the employees spend most of their work time.
• In Connecticut, Delaware, Nebraska, New Jersey, New York, Pennsylvania, and Philadelphia, the employer’s convenience is an option. If employees work remotely for convenience, you can withhold income tax for the work and your state.

Reimbursing Work-From-Home Expenses for Employees

Remote work brings certain expenses, such as personal internet connection use, that are reimbursable by the employer.

Here are the stipulations:

• The expense must be for a business purpose.
• It has to be substantiated (like providing a receipt).
• Employees must return excess reimbursements.

Here are some examples of reimbursable expenses:

• Business use of personal internet connection.
• Home office expenses include printer paper, ink, and toner.
• Co-working spaces or corporate apartments.

Wage and Hour Compliance Best Practices

These tips are integral for maintaining wage and hour compliance post-pandemic:

• Define your core working hours for all staff.
• Reinforce your organization’s general policies regarding attendance.
• Make sure your employees accurately report their working time every week.
• If your employees want to work overtime, make sure they get a supervisor’s permission first.
• Don’t tinker/modify any company-provided equipment.
• Don’t use telecommuting to expand employees’ by requiring weekend and evening work without paying for it.
• Telecommunications are not exempt, so don’t misclassify them as such.

Travel Policies

For international travel, you’re better off excluding fun and games and booking hotels instead of resorts. Also, do your best to pair corporate-wide meetings with simple luncheons and picnic-style meet-and-greets.

IRS Enforcement Initiatives

Lastly, there are four IRS enforcement initiatives that payroll administrators need to know about. They are:

1. Compliance Checks
2. Correspondence Audits
3. Field Audits
4. ERC Audits

Let’s take a closer look at each one.

Compliance Checks

• A compliance check is a less formal process than an audit, but it can lead to audits if the investigator finds something worth looking into further.
• Revenue officers will review the forms you must maintain, such as 941 and W-2s. However, they will not look through your business’s books and records.
• If an officer determines that an audit is necessary during the compliance check, they will let you know before asking any questions about your tax liability.
• If you don’t want to bother with a compliance check, you can refuse to submit it without fear of penalty.
• It’s possible to have more than one compliance check during a single year.

Correspondence Audits

• A correspondence audit is less intrusive and more automated than a field audit, and they’re conducted by examiners trained to deal with less serious tax issues. However, they suffer from some deficiencies, such as taxpayers not being contacted by auditors whenever further information is required.
• Please record everything you send to the IRS, including when it’s sent. Before the auditors close your case, confirm that they’ve considered all your correspondence.

Field Audits

• Field audits involve intensive, line-by-line analysis of Forms 941, 940, and W-2s.
• Limited-scope audits involve an interview and tour of all business premises. The officer is there to determine if all appropriate returns have been filed.
• General-scope audits are more intense, as it’s up to the auditor’s discretion to expand the audit depending on the information they uncover.

ERC Audits

Here’s the information auditors will ask for during an ERC audit:

• The original Form 941-X worksheets you used to claim the ERC.
• The old Form 941 worksheets you completed to claim any pandemic payroll tax credit.
• Employees who received wages and/or health benefits on which your ERC was based.
• Documents showing the wages you paid to employees as well as how you apportioned their health benefits.
• Paycheck Protection Program loan documents.

Closing Thoughts: Payroll Compliance in 2024

That’s all the information you need to keep your payroll in order during the calendar year. After all, if your returns are in order, you likely won’t have to deal with any audits. Even if you do, knowing what the auditors will ask for in advance is a huge advantage.