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Financial Management

Payroll Record Keeping

 

Contents

Introduction
Frequently Asked Questions
Narrative
Additional Resources
Applicable Laws

 

Introduction    Back to Top

Payroll record keeping is a term used to refer to the system an employer uses to calculate, track, and report employee pay. There are several resources available to provide information on payroll record keeping. A comprehensive list of these resources is available in the Additional Resources section below. Some of the most important highlights of these resources are:

  • Be informed - know deadlines and legal requirements;
  • Be accurate - check your work and make sure you have the most current information and forms;
  • Be on time - fines and penalties for failure to pay and/or report on time accumulate quickly;
  • Be diligent - stay on top of things.

Doing payroll isn't hard, but it does have some unique requirements that can cause problems if care isn't taken. Payroll also requires its own set of records aside from the normal financial record keeping requirements. This is so information required by the state and federal governments, the employee, and any other entity, such as an insurance or retirement plan organization or a granting agency can be tracked and reported.

A critical problem with doing payroll is failure to know and follow the rules and regulations for calculating and paying taxes. If these rules and regulations are not followed, the taxing entity (IRS or Department of Labor) is required to levy fines and penalties on the employer. As a result, the employer ends up owing much more money and could risk losing additional assets to satisfy the debt. By keeping accurate payroll records and paying the taxes owed on time, the employer can avoid stiff fines and penalties. Failure to comply can have serious consequences and even result in criminal prosecution.

It is important to keep in mind that the money that an employer withholds from an employee's pay for social security, medicare, federal income tax withholding, and employment security (unemployment tax) does not belong to the employer. It is money that the employer holds in trust status for the employee until it is deposited with the appropriate agency.

 

Frequently Asked Questions    Back to Top

Is there help available for ensuring payroll is being done correctly and in compliance with applicable laws?

Yes. The Additional Resources section lists state and federal offices that are set up specifically to provide information and assistance on payroll related questions. The IRS has separate providers available to offer assistance with payroll questions related to tribal entities (e-mail) and municipalities (e-mail). The State Department of Labor (DOL) can provide information on state payroll requirements.

Department of Community and Economic Development Local Government Assistance staff conduct regional payroll workshops and also provide on-site community assistance.

What information is needed in order to do payroll?

The following information must be available in order to pay employees:

  • Know how the organization's pay periods are set up, i.e. weekly, bi-weekly, or semi-monthly. (State Law AS 23.05.140(a) requires employers to establish at least a monthly or semi-monthly pay period. See Current Alaska Statutes.)
  • Have a time sheet or record of time worked for each employee during the pay period that is signed by a supervisor or other authorized person.
  • Know the employee's pay rate and whether that rate is paid by the hour or if it is a flat salary.
  • Have a W-4 form providing information on each employee's tax status for their tax withholding rates. (The W-4 also includes other required information such as social security number, address, etc.)
  • Know if there are any special circumstances such as: additional withholding requested by the employee, child-support payments that an employer may be required to withhold and send to a designated entity, tax liens, any direct deposit information, retirement plan information, leave policy, or any other special information affecting an employee's pay.

Where would the employee information needed to do payroll be kept?

The employer is required to maintain a personnel file on each employee with a record of earnings and other payroll information. Since information in the personnel file is considered confidential, these files should be kept in a locked file cabinet and access should be limited to certain authorized individuals.

NOTE: If there is a change to the employees withholding information or name change, it is the responsibility of the employee to revise their W-4 and/or contact the Social Security Administration with the name change information. Payroll personnel are not authorized to make changes unless the employee has done the necessary paperwork.

What government forms and publications are needed to do payroll?

A complete list and instructions are available in Commerce's Payroll Handbook for Small Communities. You should also contact your local IRS and State Department of Labor offices to confirm what you need.

At a minimum, the following are required:

  • A federal form W-4 and a federal form I-9, filled out by the employee providing the employee's personal information and verifying the employee's eligibility to work in the U.S.;
  • A federal form 8109 or 8109-B which is used to make your federal tax deposits (employee withholding, social security, and medicare) to your federally approved financial institution;
  • A federal form 941 to make quarterly withholding and payment reports to the federal government;
  • A federal form W-2 to make annual withholding and payment reports to the employee and federal government;
  • A federal form W-3 to transmit the W-2s;
  • A State Department of Labor Employer's Quarterly report form; and
  • Federal publication 15 Circular E in order to calculate the employee's federal withholding tax, unless you have a payroll program that already contains this information.

How do you get federal and/or state forms?

The state and federal governments have regional offices in Alaska that have payroll forms and forms are available on the Internet. You can also request forms by phone from state and federal agencies.

What is an EIN and SEIN?

EIN stands for Employer Identification Number. SEIN stands for State Employer Identification Number.

Every employer must request and be assigned an employer identification number (EIN) from the Internal Revenue Service (IRS). When the IRS assigns the EIN, it will also provide federal payroll tax forms and tables needed to calculate and pay federal taxes. The IRS uses the EIN as a reference number to keep track of employee and employer taxes. An EIN only needs to be applied for once. If your organization has been an employer in the past, it probably already has an EIN.

The SEIN is the state employer identification number that the state DOL assigns to the employer. The employer requests this number from the State Department of Labor, Employment Security Division (ESD).

How do I pay the federal payroll taxes?

After determining the correct amount of federal tax owed, the federal income, Social Security, and Medicare taxes are paid with the same check using form 8109 or 8109-B. The payment must be submitted to a bank that is qualified to receive federal tax deposits. Check with the bank that your organization does business with to find out if it is approved to receive federal tax payments.

When does the employer pay the federal payroll taxes?

Depending on the employer's payroll tax deposit history for a given "look back period" the IRS determines whether it is a monthly or semi-weekly depositor. Our recommendation, however, is to deposit payroll taxes at the same time the payroll is done. This helps to streamline the process since all the steps are completed at one time, ensures that the deposits are made timely, and eliminates possible confusion about when and if payroll taxes were deposited.

What are some of the differences that determine whether a person is treated as an employee or contractor?

The IRS "Circular E, Employers Tax Guide" provides the IRS definition of an employee. The State Department of Labor, Employment Security Division also provides information and assistance in making this determination.

There are some general rules that will help correctly identify whether a person is an employee or a contractor. If the employer has control over the worker's job, pay, timeline, and duties performed, they are considered an employee.

A contractor, however, performs work that is not in the regular course of business for the employer and the employer does not have direct control over the contractor's daily activity. Contractors are generally hired to perform a certain task for the employer. Once that task has been performed there are no longer any ties between the contractor and the employer. Also, the contractor may work for several employers at the same time. When in doubt, check with the IRS and/or state DOL.

A worker can either be a contractor or an employee. If a worker is a contractor the employer is not normally responsible for withholding taxes and payments from their pay. If a worker is an employee, the employer is responsible for calculating withholdings; paying the federal government withheld income taxes, Social Security and Medicare payments (both employee and employer portion); and reporting employee taxes to the IRS.

How soon after employment terminates does an employee have to be paid?

Alaska Statute 23.05.140(b) outlines these requirements. (See the Current Alaska Statutes.) If the employer terminates the employee the employer has three working days to pay the employee all wages, salaries, or other compensation. If the employee terminates employment, the employer may pay the employee all wages due at the next regular payday. If the employer received notification of the employee's termination less than three working days prior to the payday, the employer may pay the employee on the following payday without penalty.

What are the rules regarding overtime and where would I find information on exemptions?

Payment of overtime is addressed in AS 23.10.060. An employee eligible for overtime compensation must be paid one and one half times their regular pay rate for any time worked over eight hours per day and any time that is over 40 hours per week. There is a long list of exemptions in AS 23.10.055 that may affect a city or village. AS 23.10.055(5) exempts employees of federal, state, or local governments from overtime compensation under the state Wage and Hour Act, but not the federal Fair Labor Standards Act. (See the Current Alaska Statutes.)

As an employer is the city responsible for reporting stipends paid to council members and others as meeting fees?

Yes. City governments are required to report stipends as wages. This means that a council member is treated like any employee and federal income tax, social security, and medicare taxes for council members or other government officials receiving stipends are withheld and the stipends are reported on a W-2.

 

 

Narrative    Back to Top

Paying employees accurately and reporting taxes is one of the most important jobs of any employer. Considering that labor costs are a large portion of a municipality's budget, and that failure to properly pay federal and state taxes results in severe financial penalties, it is worth paying attention to the accuracy of payroll record keeping. Often the largest expense for a small community is employee salaries. Keeping accurate and up-to-date records also helps ensure that elected officials are able to make informed decisions about the future of the community.

State law AS 23.05.080 requires that employers keep certain employee records with specific information for a minimum of three years; however, there are other laws in effect that require certain records be kept for longer. A record of the employee's pay rate history must be kept for 50 years. The Alaska Records Retention Schedule provides timelines for how long payroll records should be kept by local governments.

Common payroll abbreviations:

  • IRS - Internal Revenue Service
  • FICA - Federal Insurance Contribution Act
  • FUTA - Federal Unemployment Tax Act
  • ESC - Employment Security Contribution (State unemployment)
  • FLSA - Fair Labor Standards Act
  • OT - Overtime
  • UI - Unemployment Insurance
  • 941 - Federal quarterly tax report form

 

Additional Resources   Back to Top

Publications

Alaska Department of Community and Economic Development (Commerce), Payroll Handbook for Small Communities
Local Government Handbook - Managing City Finances
Alaska Department of Labor & Workforce Development (DOL), Employment Practices and Working Conditions
IRS, Publication 15 Circular E, Employers Tax Guide
IRS, Publication 963 Federal-State Reference Guide
DOL, Alaska Employment Security Tax Handbook
DOL, Do You Have Contract Labor?
Commerce, Records Retention Schedule
DOL, Alaska Employer Registration Form
DOL, Are You An Employer Required To Pay UI Taxes?
Department of Education, Division of Archives and Records Management, Local Government Records Retention Schedule

Internet links

Alaska Department of Labor and Workforce Development
Alaska Statutes
Alaska Regulations
Alaska Department of Law
Internal Revenue Service
E-mail Gary Petersen
E-mail Judy Pearson
IRS Federal, State, and Local Government website
Social Security Administration Local Government Employers website
Alaska Department of Administration, Division of Retirement and Benefits, Social Security Administrator, E-mail Kay Guyton

 

Applicable Laws    Back to Top

Federal (See Fed Law) Fair Labor Standards Act (FLSA) 29 USC
Federal Unemployment Tax Act (FUTA) 26 USC Chap 23
Federal Tax Code 26 USC
Federal Insurance Contribution Act (FICA) 26 USC Chap 21
Medicare 26 USC Chap 24
Davis-Bacon Act 40 USC Chap 3
Immigration Reform And Control Act 8 USC

State (See Current Alaska Statutes)

AS 23.05.080 Employer's record keeping responsibility
AS 23.05.140 Pay periods and penalties
AS 23.05.160 Written notice of pay rate, pay periods
AS 23.05.170 Laid off/striking worker pay
AS 23.05.180 Wages in dispute
AS 23.05.190 Enforcement, investigation
AS 23.05.200 Hearings on wage claims
AS 23.05.210 Attorney general civil prosecution
AS 23.05.220 Assignment of lien or wage claim
AS 23.05.230 Prosecution of claims
AS 23.05.270 Violations by employer
AS 23.05.280 Penalties
AS 23.10.040 Payment of wages in state
AS 23.10.043 Deposit of wages
AS 23.10.045 Payment of funds in trust, violation
AS 23.10.047 Employee's lien against employer
AS 23.10.055 Exemptions from Wage and Hour Act
AS 23.10.060 Payment for overtime
AS 23.10.065 Minimum wages
AS 23.10.070 Exemptions from minimum wage
AS 23.10.100 Employer's record, records retention
AS 23.10.105 Workplace posting of Wage and Hour Act information
AS 23.10.110 Employee's legal remedy
AS 23.10.130 Statute of limitations
AS 23.10.135 Violations
AS 23.10.140 Penalty
AS 23.10.145 Definitions
AS 23.10.430 Employee access to personnel files
AS 29.20.380 Duties of municipal clerk, records management, records retention schedule, procedure for inventory, storage, and destruction of records
AS 29.20.500(4)(5) Duties of municipal manager, reports, custody of municipal property
AS.40.21.020 Archival and records management program creation and administration
AS 40.21.030 State archivist, review and approval of agency records retention schedules
AS 40.21.070 Records management using program established for state records, state archival assistance
AS 40.21.080 Disposal of public records, list of records being disposed, written authorization for disposal
AS 40.21.090 Records transferred by political subdivision to state
AS.40.21.110 Care of records, transfer of records to successor

NOTE: There are many other laws relating to personnel management and allowable practices. The above laws pertain directly to payroll activities however.

Revised 4/8/03

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