Payroll Administration

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Overview

Local governments must follow certain administrative processes when preparing and distributing payroll checks or warrants to their employees and remitting payroll taxes and contributions to various state and federal agencies. Each of these areas are guided by federal and/or state law along with local policy adopted by the jurisdiction.

The creation and generation of payroll starts with an understanding of the wages being paid, the withholding requirements for the employee, and the benefits being provided by the employer (local government). Each of these various aspects will impact the gross payroll of the entity as well as the net pay of the employee.

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Employees vs. Independent Contractors

Local governments will frequently hire independent contractors to perform work. For payroll purposes, it is important to determine whether the individual hired is an employee or an independent contractor under the lens of both state and federal employment law. The distinction will affect withholding requirements, minimum wage requirements, benefits, and more. This analysis is important, as many local governments will hire “independent contractors” to perform services but then treat the individuals as employees.

There are many factors that help determine whether a worker is an employee or an independent contractor. Generally speaking, the answer revolves around the amount of control the employer has over the worker. A worker is your employee if you have the right to control their work, while an independent contractor is usually hired to perform specific tasks with a contractual obligation to complete the work within a specified timeframe with little to no control over how they perform the work.

If an independent contractor is hired and later determined to be an employee of the organization, it can lead to significant compliance issues with federal and state laws, as well as local policies adopted to provide protections and benefits to workers. The results can be substantial penalties and interest on unpaid taxes and benefits. RCW 49.44.160 speaks directly to this issue:

The legislature intends that public employers be prohibited from misclassifying employees, or taking other action to avoid providing or continuing to provide employment-based benefits to which employees are entitled under state law or employer policies or collective bargaining agreements applicable to the employee's correct classification.

For more information on this issue, see:

• U.S. Internal Revenue Service: Independent Contractor (Self-Employed) or Employee?
• U.S. Department of Labor: FLSA Advisor – Independent Contractors
• Washington Department of Labor and Industries: Independent Contractor Guide

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Payment Intervals and Pay Periods

A pay period is a defined time frame during which employees perform work and for which the employees will receive a paycheck.

A pay day is a specific day or date established by the employer on which wages are paid for hours worked during a pay period. There is typically a lag of a few days to a week between the end of the pay period and the pay day when employees receive their paychecks. This lag allows the agency time to verify the accuracy of timesheet data, prepare payroll checks, and distribute pay to the employees electronically or by physical checks.

These payment intervals are established individually by each local government entity and can be monthly, bi-monthly, bi-weekly, or weekly, but they may be no less frequent than monthly.

WAC 296-126-023 and WAC 296-128-035 provide guidance on payment intervals. For example, if your agency uses semi-monthly pay periods (the first pay period covering the first day of the month to the 15th and the second pay period covering the 16th to the last day of the month), you must pay wages no later than the 25th day of the current month for the first pay period, and no later than the 10th day of the following month for the second pay period.

Likewise, for those entities that pay on a monthly pay period, the timesheet would be remitted on the same day that the employee is working. This presents an internal control concern, since there is no time to certify timesheet activity for the last day of worker activity. Should the worker become ill or have a personal emergency that requires that they leave work early, there must be a method established to capture this leave information in a subsequent pay period. WAC 296-126-023 and WAC 296-128-035 demonstrate the requirements for monthly pay periods:

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Timesheets

One of the first steps in preparing an employee’s compensation check/warrant is determining whether the employee is compensated on an hourly (wage) basis or annual (salary) basis. Executive, administrative, or professional employees are frequently compensated on a salary basis, while other employees are usually compensated on an hourly basis.

All hourly (non-exempt) wage employees must complete a timesheet that reflects actual hours worked within the pay period, plus leave hours such as holidays, vacation leave, sick leave, bereavement leave, comp time used, or other paid time off.

Salaried (exempt) employees are not necessarily required to complete a timesheet, as the expectation is that the exempt employee will perform the work required of the position whether that equates to more or less than 40 hours in a work week. However, the most accurate method is to have the exempt employee complete the timesheets for actual hours worked or leave hours used in order to accurately meet reporting requirements for various state agencies.

All timesheets should be reviewed and approved by the employee’s supervisor or manager; in smaller jurisdictions, this may be the mayor or board president. This oversight ensures that local governments have adequate internal controls over the payroll process and have satisfied the requirements of RCW 42.24.080, which requires all claims for services or labor to be audited and certified as true and just claims against the jurisdiction.

If an error or discrepancy is discovered during the process of authenticating the timesheet activity, the employee must be notified, and edits must be made and approved by the employee with subsequent review and approval by management.

Leave Request Forms

Completed leave request and approval forms should be attached as part of the timesheet submittal process. Local governments should have personnel policies in place that address the accumulation and use of vacation leave, sick leave, bereavement leave, comp time, and other forms of leave provided by the entity.

The submission of a completed leave form provides documentation and support to the timesheet data submitted by the employee. Leave request forms also provide an internal control measure to ensure the accurate recording of leave time used. Unrecorded leave use demonstrates both a lack of internal control and the potential for a gifting of public funds.

This is especially true of exempt employees if your entity does not require timesheets. An exempt employee must complete a leave request form for leave time used to ensure that accrued leave balances are both accurate and true.

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Overtime Wages

Under state and federal law, nonexempt employees must receive overtime pay for all "hours worked" above 40 hours in any individual work week. (Law enforcement, fire protection personnel, and public hospital employees may have different thresholds.)

To calculate overtime, it is essential to know whether each position is properly classified as "nonexempt" or "exempt," which will determine whether the employee is eligible for overtime pay and/or comp time accrual. Just because an employee is salaried does not automatically make them exempt from overtime.

An integral component of accurately calculating overtime wages is knowing the actual hours physically worked within the work week. Leave hours and holidays and not required to be counted as "hours worked."

For instance, if the employee receives a paid holiday or uses paid leave that results in the employee reporting more than 40 hours in a work week, the holiday/leave hours reported in excess of 40 hours would not trigger overtime payments and could be returned to the employee for use during a subsequent work week or be paid as "straight time" at the employee's regular rate of pay, depending on the agency's policies and agreements.

(However, some jurisdictions may have established more generous provisions in their collective bargaining agreements and/or personnel policies that count holidays and leave as "hours worked" subject to overtime.)

See the examples below:

WAC 296-126-023(6) and WAC 296-128-035(6) require employers to pay overtime wages to employees on the regular pay day for the pay period in which the overtime wages were earned.

However, for those jurisdictions using a monthly or bimonthly pay period, the calculation of overtime pay frequently cannot be completed for the last portion of the pay period due to the misalignment of the work week and the pay period. For instance, the "work week" for overtime purposes might be Sunday through Saturday, but the pay period might end on a Tuesday or Wednesday.

In these instances, the regulations state that the payment of overtime wages may not be delayed for a period longer than that which is reasonably necessary for the employer to compute and arrange for payment of the amount due, and overtime wages must be paid no later than the next regular pay day.

For instance, the WACs provide the following examples:

If an exempt employee works excessive hours beyond the normal work week, there is no requirement to compensate them for the additional time. However, some agencies may provide some limited forms of “comp time” or "exchange time" accrual for exempt employees, which should be addressed within the entity’s personnel policies. For more information, see our page Overtime and Comp Time.

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Gross Pay: Taxable Income and Pre-Tax Deductions

One of the factors in calculating employees' pay accurately is distinguishing between taxable and non-taxable income. Generally speaking, all wages paid to the employee for services performed are considered taxable income (IRS Publication 15). This includes wages, salaries, leave pay (vacation, sick leave, bereavement, holidays, and other forms of leave provided), bonuses, and taxable fringe benefits (see IRS Publication 15-B).

However, certain portions of an employee's pay may be non-taxable, such as travel and expense reimbursements and certain "de minimis" income as discussed in Publication 15-B.

In addition, some wages being paid and subsequently withheld may be considered pre-tax wages. These wages are deducted from the employees’ pay for options and benefits that are exempt from federal income tax withholding and provide a future benefit to the employee, such as deferred compensation plan contributions (DCP), health savings accounts (HSA), and cafeteria plan (Section 125) contributions.

It is important to understand what wages are subject to federal tax withholding and which are considered exempt or pre-tax. IRS Publication 963 – Federal-State Reference Guide is a comprehensive resource for local governments that explains wage reporting and employment taxes.

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Mandatory Withholding and Employer Contributions

Generally speaking, employee wages are subject to withholding (deductions) for certain state and federal taxes. Some programs also require the employer to provide contributions.

While elected officials are not considered by local governments to be “employees” in the same way that staff and appointed officials are, they are generally considered employees under state and federal tax laws and are subject to payroll taxes and withholding like any other employee (except for state unemployment insurance).

The table below outlines the mandatory payroll deductions and contributions that are typical of an employee paycheck; these items are discussed in more detail below.

Federal Income Taxes, Social Security, and Medicare

Social Security, Medicare, and federal income taxes are often referred to as “941 taxes" due to the requirement to report them on Form 941 (see the Payroll Reporting Requirements section below). Social Security and Medicare taxes are sometimes known jointly as FICA (Federal Insurance Contributions Act) taxes.

Social Security taxes are calculated and withheld at a flat 6.2% of all wages paid up to a Social Security wage base that changes each year with the national average wage index. Any wages above the wage base are exempt from Social Security withholding. (Social Security taxes may not be applicable in those jurisdictions that are enrolled in the State Retirement Systems and do not have a Section 218 Agreement in place and on file with the Department of Retirement Systems. Verify whether your entity has a Section 218 Agreement.)

Medicare taxes are calculated and withheld at a flat 1.45% of all wages paid. Unlike Social Security taxes, Medicare taxes are not subject to a wage base cap, and all wages are subject to withholding. High earners may also be subject to extra withholding for the Additional Medicare Tax.

Employers are required to provide matching contributions for both Social Security and Medicare, but not for the Additional Medicare Tax.

Federal income tax withholding will vary between individuals based on their wage/salary and how many exemptions they claim. Publication 15-T, Federal Income Tax Withholding Methods describes how to calculate federal income tax withholding using various prescribed methods (Wage Bracket Method vs. Percentage Method).

In order to determine the federal income tax that should be withheld from an employee's pay, the employee must complete an IRS Form W-4. The IRS provides W-4 forms and instructions to assist employees with completing this required form.

Mandatory State Withholding

In addition to the federal tax requirements are state required deductions and contributions for worker’s compensation, unemployment compensation, paid family and medical leave, and long-term care (WA Cares). Washington State has no personal income tax.

For family and medical leave, the premium is split between an employer contribution and employee withholding, unless the employer has voluntarily opted to pay for part or all of the employee portion. However, the employer portion is waived for employers with less than 50 employees. For assistance in calculating the premiums and employee withholding, see the state's Paid Family and Medical Leave Premium Calculator. For more information about this program in general, see our Family and Medical Leave page.

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Optional Withholding and Employer Contributions

In one form or another, the majority of local governments provide some level of optional benefits to their employees. Along with these options there are fiscal considerations for both the employer and the employee, such as cost of the benefit being provided and whether there is a fiscal impact of reporting liabilities that may be imposed by providing certain post-employment benefits. Examples are pension liability and other post-employment benefits (OPEB) such as medical coverage through the Washington State Health Care Authority (HCA).

Below is a list of the most common options provided by local government:

• Medical, dental and vision insurance coverage
• Health Savings Accounts (HSAs) and Flexible Savings Accounts (FSAs)
• Retirement plans such as PERS, LEOFF, PSERS, or JRS with the Department of Retirement Systems
• Deferred Compensation Programs (DCP)

The benefit programs provided and the level of employer contributions will determine what needs to be withheld from the employee’s paycheck. Some of these benefits may be pre-tax deductions as discussed earlier. Some options require both the employer and employee to contribute, while employer/employee contributions for other benefits such as medical, dental, and vision insurance may be determined by local policy.

It is important to understand the employer’s obligations and enter the appropriate deduction and/or employer contribution accordingly.

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Paycheck Distribution

The distribution of payroll checks to employees, as well as the various federal and state agencies and other benefit providers, can be accomplished by two different methods.

Direct deposits have become fairly commonplace for many local governments. RCW 41.04.240 authorizes local governments with 25 or more employees to use direct deposits for payment of salaries and wages, but it prohibits local governments from requiring employees to receive direct deposits. Written authorization should be received from each employee who wishes to receive direct deposits.

The alternate method for paycheck distribution is direct distributions, where physical (hard copy) paychecks are distributed to employees on pay day. The distribution method must ensure that checks are received by the individual employee and should not be distributed to anyone other than the employee without specific written authorization.

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Payroll Errors

Payroll errors may occur on occasion. If an employee has been underpaid or a miscalculation has occurred for withholding of taxes or benefits, the error can usually be corrected in the next paycheck.

If the employee has been overpaid, RCW 49.48.200 requires that overpayment be deducted from the employee’s subsequent wages, with each deduction not to exceed 5% of the employee’s disposable earnings in a pay period (other than the final pay), until such overpayment has been fully recovered by the local government. However, the statute allows the employee to voluntarily make payments in excess of 5%, and the employer and employee may agree to a different amount or method of repayment other than a deduction from wages.

The employer must follow the procedures in RCW 49.48.210, including providing written notice to the employee that includes the amount of overpayment, the basis for the claim, a demand for payment within 20 calendar days of the date on which the employee received the notice, and the rights of the employee. The statute also sets out a detailed procedure for the employee to challenge the overpayment claim. If the employee is covered by a collective bargaining agreement, any overpayment is to be handled through the grievance procedures set out in the collective bargaining agreement.

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State and Federal Payroll Reporting Requirements

Local government employers are required to submit a variety of payroll reports to the state and federal governments. Below is a discussion of the most common reporting requirements.

For those reports that are due on a quarterly basis – including the federal Form 941 and state workers' compensation, unemployment insurance, and paid family and medical leave – the reporting schedule is summarized below:

Federal Form 941 (Quarterly)

Employers must report federal payroll tax withholdings and contributions to the IRS on a quarterly basis using Form 941. These so-called “941 taxes” (see Publication 15, Employers Tax Guide) consist of federal income tax withheld and both the employer and employee portion of Social Security and Medicare taxes. Federal tax liability is based on the dates that wages are paid (pay days). However, the deposit of taxes and the reporting of the tax liabilities are managed separately.

Form 941 (see IRS instructions) is separated into sections to identify total wages/salary paid during the quarter, the tax obligations of the employee and the employer during the quarter, and the reporting of deposits.

However, employers must remit the 941 taxes to the IRS on a quarterly, monthly, semi-weekly, or next day deposit schedule. The deposit frequency will depend on the employer's tax liability in a four-quarter lookback period which begins July 1 and ends June 30. (Adjustments made on a form 941-X do not affect the amount of tax liability for purposes of calculating the total tax liability for the lookback period.)

The deposit schedule for 941 taxes after accessing the lookback period is:

• Quarterly deposit of 941 taxes can be made if the total taxes are less than $2,500 for the current quarter or the prior quarter, and you have not incurred a $100,000 next-day deposit obligation.
• Monthly deposit if the total taxes for the lookback period is $50,000 or less. Taxes must be deposited by the 15th day of the following month.
• Semi-weekly deposit if the total taxes for the lookback period are greater than $50,000. Under the semi-weekly deposit schedule, 941 taxes for paychecks released on Wednesday, Thursday, and/or Friday must be deposited by the following Wednesday. For pay days that fall on Saturday, Sunday, Monday, and/or Tuesday, deposit the tax liability by the following Friday.
• Next day deposit rule. If you accumulate 941 taxes of $100,000 or more during a monthly or semi-weekly deposit period, you must deposit the tax by the next business day.

Reporting of the deposit schedule is completed either in Part 2 of the 941 quarterly report or on a separate Schedule B to be attached to the 941 tax report (for semi-weekly or next day depositors).

Form 941 reports must be submitted by the end of the month following the close of the calendar quarter.

Federal Forms W-2 and W-3 (Annually)

Every January, local governments must file W-2 forms for all employees (including elected officials that you have compensated) summarizing the payments, deductions, and contributions made during the previous calendar year.

A completed Form W-2 should be generated for each employee and should reflect:

• Employer federal tax ID number, name, and address
• Employee name, address, and Social Security number for all employees who you withheld 941 taxes, or whom you paid but did not withhold due to exemptions from withholding on Form W-4, and other employees who you may have paid wages but did not withhold any 941 taxes.
• Gross wages paid to the employee subject to federal withholding and gross wages subject to Social Security and Medicare tax.
• The employee portion of Social Security and Medicare taxes withheld.
• Elective deferrals such as 403(b) agreements, ROTH contributions and other deferred arrangement plans.

Each employee must receive a copy of their individual Form W-2 on or before January 31.

The Forms W-2 also must be transmitted to the Social Security Administration (SSA) by January 31 (or the next business day if the 31st falls on a weekend) using a single Form W-3 and attaching Copy A of each employee’s W-2. The W-3 form reflects the accumulated totals of wages paid and taxes remitted to the SSA for all employees paid during the calendar year. Form W-3 is changed each year to reflect the latest changes to Form W-2, so be sure to use the correct W-3 form for the year being reported.

State Workers' Comp, Unemployment, and Paid Family & Medical Leave (Quarterly)

Local government employers are also required to file three separate quarterly reports with the State of Washington. Unlike the separate 941 tax reporting and remittance requirements, state taxes and premiums are reported and remitted together. The following state reports are required for all employers:

• Workers’ Compensation: Department of Labor & Industries (L&I). Employers or their third-party payroll processors must submit employee data reported by job classification type, total wages paid, total hours worked, and total contributions made by the employer and/or employee. This information must be submitted quarterly via L&I’s online filing portal.
• Unemployment Insurance: Department of Employment Security (ESD). ESD reporting requirements consist of employee activity for the quarter for all employees, including employee name, Social Security number, gross amount paid, and actual hours worked (including overtime hours) plus number of hours for leave with pay. (Elected officials are not considered reportable employees (RCW 50.44.040(10)(a) – see ESD exempt professions chart). This information must be reported quarterly either online or by submitting paper forms.
• Paid Family and Medical Leave (PFML). Employers must report hours worked, wages paid, and premiums collected and/or contributed. This information must be submitted quarterly through the PFML online reporting tool.

Other Reports (Monthly)

Local governments provide many additional benefits to their employees that will require monthly reporting and remittance of collected premiums or contributions. Some examples include:

• Department of Retirement Systems – for PERS, LEOFF, PSERS, or JRS pension programs;
• Deferred Compensation Programs;
• Medical, dental and vision insurance programs; and
• Health Savings Accounts (HSAs) and Flexible Savings Accounts (FSAs).

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Payroll Records Retention

Payroll records and forms should be retained according to the required state and federal retention periods. For instance, while the IRS requires employers to retain a copy of Form W-3 and Copy D of all Forms W-2 for at least four years, local governments in Washington must retain these documents for at least 5 years under RCW 82.32.070 and the Washington State Local Government Common Records Retention Schedule (CORE).

Payroll records can be tricky because different retention requirements apply to different types of payroll information. In particular, information relating to eligibility for retirement benefits can have a very long retention period. The State Department of Retirement Services may need such records many years later to determine a former employee’s eligibility for retirement benefits.

For more information on payroll records retention, see CORE Sections 3.5 (Payroll), 3.8 (Financial Management Reporting), and 4.2 (Employee Benefits).

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Recommended Resources

Below are some recommended resources related to payroll administration:

• Internal Revenue Service (IRS) Publication 15 (Circular E), Employer's Tax Guide – Essential and detailed reference tool for federal tax requirements for employers
• State Auditor's Office (SAO) Center for Government Innovation: Resource Library – Payroll – Includes helpful guides and checklists for payroll-related processes