3 Factors that Complicate Payroll in the United States
In the recent 'Payroll complexity Index 2013' NGA HR research paper we concluded that the US ranked 7th out of 10 in overall payroll complexity by country.
With this blog, I would like to explore what complicates US payroll to see if organizations can include this in their HR & Payroll strategy going forward. When I drill down the United States payroll, I can conclude that it is complicated by a number of factors specifically related to:
- Increase in tax complexity
- Private healthcare benefits
- Pay frequencies
The very mature US payroll market also has naturally high expectations for delivery and support systems and organizations. This article covers some of the most common drivers for cost and risk assessment in US Payroll.
1. Increase in tax complexity
All 50 US States pass their own legislation that affects net tax and healthcare calculations. For compliance purposes this can be much like managing 50 small countries. A new implementation and support for 50 employees in 50 unique states can be as complex (if not more complex) as 1,000 employees in just a few states.
Taxes are calculated uniquely for 5000+ possible tax authorities including all local tax agencies. Some states are more challenging than others, for example:
-Pennsylvania has over 5,000 local tax jurisdictions alone.
-Ohio has over 1,000 local tax jurisdictions.
-Kentucky has over 300.
Mid quarter / mid year payroll conversion is not easily done in the US. Tax reporting in the US includes different frequencies of tax payments. Employers pay several different agencies different taxes for each state. While mid-year at quarter end is possible and happens often, the reconciliation for the quarterly conversion is still a consideration significantly impacting implementation timelines and risk. A mid-quarter conversion can be 3 to 4 times the work effort and 3 to 4 times (or more) the risk due to the tax complexity for all tax agency combinations described above.
Misreporting or underpaying taxes mid-quarter can result in penalties and interest for many years to come after an incorrect tax and wage conversion is discovered. Taxes are filed and reconciled quarterly in full. So, an end-of-quarter conversion is strongly preferred by most providers and customers in the U
.S . in order to ensure a “clean break” in the hand off from one provider to another.
2. Private healthcare benefits
Private health care results in many more plan and calculation options for which automated interfaces are commonly required to and from payroll systems. A typical US customer with outsourced payroll (with 1000 or more employees) is likely to need 10-20 interfaces to handle the data exchange for health care administration alone. For larger organizations integration can be an exponentially more significant portion of the work involved- sometimes as much as 50-80% of total budgeted effort to implement Payroll projects. Therefore, strong but flexible integration skills are critical for a successful large scale implementation.
Political changes have also recently created challenges for US companies in benefit and tax administration related to Federal initiatives such as same sex spousal coverage. These sudden legal changes have left customer scrambling for solutions to assist in compliance. States also trail Federal changes in their legal process so additional legal changes are often evolutive and constant rather than one-time to address needs across different state taxing authorities.
3. Pay frequencies
The US Payroll market has been somewhat consolidated and industrialized for 30+ years and with that market maturity comes higher expectations for service level agreements that may be common in some other countries. This is further complicated by many of the aspects covered below:
Pay frequencies vary widely and weekly, bi-weekly and semi-monthly frequencies mean payroll and application support issues must be dealt with immediately (in hours, not days or weeks). This often creates a much greater sense of urgency and a critical need for well-defined, real time communication channels across customer teams and support teams. Perhaps more so than in some monthly-frequency-only Payroll delivery and support environments.
Correction payments and fast payroll error resolution times are mandated for legal compliance in some states and by some collective bargaining agreements. An example, a company of 5,000 employees paid monthly with few off cycle corrections in Europe might be around 5,000-6,000 disbursements (payments) and nearly 100% of that through a common bank transfer file.
Example: US payroll complexity
In the US for a 25% weekly population (which is not unusual) this would amount to (1,250(25%) * 4 = 5,000 + 3750(75%) = 8,750 * 10% correction runs = 9,625 payments per month distributed by both paper checks and deposits (Most U.S. firms are still required to comply with paper check distribution requests). The result is nearly double the amount of payments for the same employee population in other countries where payments are monthly only, few corrections are issued between regular cycles and payments are made only electronically.
Lastly, self-service users are often "high touch", requiring frequent calls and interactions due to the legal complexity, velocity of changes, and often the average volume of employees in a US organization. Although Spanish language for these kinds of employee interactions is not a legal requirement it is becoming increasingly critical in user experience, forms and reports depending on industry sector and geographic locations.
Taking into account all of the above, US Payroll definitely earns its high spot on the list of most complex global payrolls.