Fair or not, payroll is not the same for everyone. Depending on the industry your business is in, you may be faced with regulatory challenges that others don’t have. The agricultural, restaurant, construction, religious, and nonprofit industries have industry-specific payroll tax rules and IRS reporting requirements they must comply with to avoid penalties.
The Importance of Industry-specific Payroll
Much of what you come in contact with regarding payroll by industry, like services, questions and answers (Q&As), time and attendance resources, and so on is not specific to your industry or organizational needs. This nonexclusive approach to your payroll solution can help you pay your employees, but that is about it.
There are several other regulations and industry-specific best practices you may need to know, including how to make proper overtime calculations, how to track work hours for employees performing multiple jobs, and what work minors can perform versus what they cannot, to name a few. It’s important to spend time learning the ins and outs of payroll because the Department of Labor (DOL) can subject you to numerous fines and penalties if you make a payroll mistake.
If you violate the minimum wage or overtime pay laws, you may face civil penalties of up to $1,000 for each violation. The Fair Labor Standards Act (FLSA) can stop you from doing business if you don’t follow the general pay, labor, or industry-specific payroll laws.
There is a common misconception that payroll simply means paying your employees. Although this is a part of the payroll process, payroll also encompasses much more; for example, ensuring appropriate taxation, understanding detailed industry-specific employment laws, and funding fringe benefits are also a part of this process.
Since there are countless industry-specific employment laws to be aware of and actively manage, using a payroll partner like Gusto is a good idea. It’s built specifically for small businesses and delivers services for every industry, including restaurants, retail stores, and even accounting and bookkeeping (it has a partner program bookkeepers can use to manage each of their clients).
Types of Payroll by Industry
Some industries have more unique payroll obligations than others, and there is often more than one way to fulfill each requirement. For example, if you own a restaurant, you may choose to track your employees’ hours worked manually using time cards instead of a time tracking software (if you only have a few employees). There are pros and cons to just about every option available, so consider each one carefully as you decide how to proceed.
Here are the different types of payroll by industry:
The way you classify household workers, like live-in babysitters or housekeepers, is important (employee versus contractor), and the Internal Revenue Service (IRS) has outlined how they should be classified and paid. Usually, nannies and other home-based family care providers and housekeeping staff are considered employees of the family that pays them. Ever heard of the nanny tax? Some of these workers are classified as independent contractors which, in certain cases, is fine, as long as you don’t control how they perform their job and they are able to work for multiple customers (or families).
If household employees work for a single family with restrictions that don’t allow them to pick up additional employment opportunities, the IRS will more than likely consider those individuals employees of the family. There is a lot to consider when employing and paying household employees, so do your homework ahead of time.
Restaurants must consider numerous industry-specific payroll laws to avoid being penalized, e.g., establishing a fool-proof tip reporting program. The IRS has tip reporting regulations in place that you may be required to follow. Although there are a number of payroll services that work well for restaurants of any size, doing some research on providers that meet your specific food service needs will be an important first step.
Nowhere is payroll by industry more specific and complicated than within the agricultural industry (which includes businesses that engage in or with farming, dairy, ranching, crop fields, and so on). The smaller a farm operation is, especially if it’s a mostly family-staffed farm operation, the more likely it will be exempt from minimum wage and overtime pay laws. And in many cases, the times and hours that minors can start working are less restrictive than for other industries.
Some FLSA requirements are the same regardless of what your agricultural operations look like. Employers must keep accurate timekeeping records of all employees’ work time (regardless of whether it’s time spent traveling between fields, waiting on equipment fixes, on site supervisor arrival, or for standard work breaks), and although minimum wage laws do not always apply in this area, adhere to the rules that are in place.
Nonprofits are unique because they are exempt from federal income taxes, even though they still need to collect it from their employees. They must classify the people providing services to them in one of three ways: as full- or part-time employees, independent contractors, or volunteers (who are not generally compensated).
Nonprofit organizations are also classified into subcategories that have different tax regulations. Some nonprofit organizations, like a 501c(3), are exempt from federal unemployment taxes (FUTA), but some other nonprofits are not. The IRS has outlined several of the nonprofit regulations relating to payroll.
As with many industries on this list, religious institutions, regardless of faith or ideology, must also adhere to several unique payroll and employment laws. For example, it’s important to be clear on any housing allowances you pay clergy members or ministers, utilities that employees pay, and so forth. Some allowances (specifically housing for ministers) aren’t taxable and can be excluded from the gross income you report for their taxes.
The construction industry has several unique payroll requirements per the IRS. For instance, because many construction employees routinely travel from one job site to the next, employers must be aware that they’re responsible for paying non-exempt employees for travel time to sites that are outside of their “normal commute.”
From state to state (yes, I’m looking at you, California), there are different versions of this law that employers need guidance on. Also, if your construction company works on federal contracts, it will be subject to certified payroll requirements (which involves submitting a special weekly payroll form to the agency overseeing contract funds).
This section is less about industry-specific payroll laws on how to pay accountants or finance professionals and more for accounting and bookkeeping professionals themselves. Depending on the type of business clients you have, you may need to know the payroll caveats for multiple industries (like the ones we describe in this article). This is where payroll software like Gusto can assist. It has a Gusto for Partners product that allows you to set up and manage payroll for all of your clients separately.
Industry-specific Payroll Services Frequently Asked Questions (FAQs)
Although some industries require unique approaches to payroll, everyone wants their employees to be paid. We have found that, regardless of industry, many small businesses have the same questions. We address a few here that will help you further define what payroll resource is best for you.
Are there other industries that may require specific payroll platforms?
There are many industries not listed here that have specific requirements. Whether they are IRS regulations or just best practices, some additional industries that we recommend you get specialist guidance for include:
- Oil and gas
- Day laborers
- Call centers
- First responders
- Information technology (IT) and computer
Regardless of my industry, what are the basic things I need to know about processing payroll?
There are several functions that payroll processing serves. Here are the main attributes of payroll processing, regardless of what industry you operate within:
- A good payroll system is the best way to pay employees.
- If your organization maintains healthcare benefits, payroll will be how you withdraw from your employees’ pay to fund the program(s).
- You must withhold and pay your employees’ income tax.
- You must report wage earnings to the government.
- Payroll systems help maintain overall labor law compliance.
Do I need a payroll system or can I just pay employees in cash?
The simple answer is “yes,” you can pay your employees in cash. However, you will more than likely catch the IRS’ attention. This can make accounting tasks much more difficult for your controller, place the burden of taxation onto your employee (which is usually disastrous), and you will have a challenging time maintaining and expanding benefits to your employees.
What are examples of third-party payroll liabilities?
In addition to withholding taxes, employers usually withhold the employee’s portion of healthcare insurance premiums, 401(k) or 403(b) investments, and other fringe benefits. When these deductions are taken out of the employee’s paycheck, the employer then forwards the funds to the relevant third parties (whether it be the insurance provider or the IRS). Most third-party payroll services will be able to assist you with any deductions your organization has.
How long do I need to retain my payroll records?
Retaining payroll records is a critical part to running a responsible business (as you retain safety and Occupational Health and Safety Act (OHSA) records, legal documents, tax records, and so on). According to the FLSA, the general rule is to maintain payroll records for three years. The IRS requires you to retain all records of employment taxes for at least four years.
Many small companies choose not to manage payroll in-house because the regulations, tax laws, and related requirements are too many to keep current on. When you take a step back to consider all of the industry-specific payroll forms, tax rules, and labor laws, it can seem daunting. Utilizing the resources listed here (in addition to the IRS website) as your starting point will help you move forward in the right direction.