“Payroll” refers to the payments companies make to their employees and/or contractors in exchange for their services. It’s usually handled by the Human Resources department of an organization. While usually an afterthought for most employees, the process of running payroll can be extremely tedious and complex depending on the business process. In the United States, the team in charge will need to have an understanding and solution for the following items:
Most companies outsource the majority of these processes to a direct payroll provider. However, the software required depends on where the company and employees are located, and where the work is done. In the next section we’ll look at some of the differences in payroll legislation by country.
In the United States we have a locality-based taxation system. This means that individual cities and counties in certain states are free to impose their own payroll taxes and reporting requirements. These are in addition to the Federal and State payroll laws, which all but 9 states have. This leads to a complex ecosystem where millions of payroll scenarios can arise due to 25,000+ tax changes per year, 11,000+ tax jurisdictions, and dozens of reciprocal agreements signed between states. Reciprocal agreements, also known as a reciprocity agreement, is a treaty signed between states when a worker works in one state and lives in another. Not all states have reciprocity agreements, which can lead to confusion and double-taxation.
In the European Union, member countries each impose a different set of rules when it comes to payroll tax. Dissimilar to the U.S, European employees are generally only taxed in the location in which they reside. E.U. citizens must generally reside in a country for over six months to become eligible for taxation. HR and data requirements are also dependent on the respective country, for example: payroll record keeping. In some states, electronic copies are all that are required while others require physical copies stored for a certain period of time.
This is all to illustrate that tax compliance in payroll is a location-based system. Employers should be certain that the software they use to manage payroll has coverage in their locality or state, or that they have a good understanding of the applicable laws.
United States employers are required to confirm their employees are legally permitted to work within the country. It’s the responsibility of both employee and employer to verify legal employment status. If a potential employee is not a citizen or permanent resident of the U.S. they must obtain a permit to work, known as the Employment Authorization Document (EAD), plus a work visa.
The are four categories of workers permitted to work in the U.S.:
The last bucket of non-citizen non-residents has three subcategories and is the most complex. Those categories are:
U.S. citizens are not required to obtain a working permit to work in the United States. Neither are permanent residents, outside of having their green card.
W-8 BEN is a form filed by foreigner workers who receive multiple types of income from U.S. sources. The purpose of a W-8 BEN form is to establish the following:
Citizens of the United States should not use Form W-8 BEN.
Foreign businesses use W-8BEN-E, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting, while foreign workers use W-8BEN.
Under a tax treaty, residents of foreign countries can be eligible for reduced tax rates than otherwise. Most of the United States’ allies have such tax agreements, including:
Mistakes that trigger compliance audits/fines include: failing to complete/re-verify I-9/E-Verify for employees, misclassifying employees as contractors (or vice versa), not withholding appropriate taxes, failing to report new hires, not paying minimum wage or overtime, failure to provide required pay-stubs, missing child-support garnishments for contractors, incorrect 1099 or W-2 filings. Fines vary but can be significant (e.g., more than $28,000 per ineligible W-2 hire).
If your business model, client demands, or regulatory environment changes and you decide to transition workers from 1099 to W-2 (or the reverse in rare cases), you need a solution that handles new onboarding (tax/wage/eligibility paperwork), modifies pay/deductions workflows, updates your pay-roll tax engine, and adjusts your billing/invoicing logic. A flexible platform built for both classification types ensures you avoid patchwork systems. Zeal supports both W-2 and 1099 at scale.
For on-demand marketplaces and staffing operations where speed matters (shifts change, high turnover), you should aim to complete onboarding (document collection, eligibility check, tax forms) in minutes, not days. A streamlined and unified mobile/remote onboarding flow helps. Zeal supports mobile remote I-9/E-Verify and e-signature onboarding to accelerate this.
Many general payroll vendors are built for “one employer, one location, one schedule” scenarios — not high-volume, many-workers, multi-location gig models. They often lack: onboarding workflows tailored to high-volume staffing, automated classification support (W-2/1099), multi-jurisdiction tax engines, fast payouts (instant, paycards), billing and receivable integration, and worker self-service portals. By contrast Zeal is built for staffing/gig scale.
In on-demand or staffing operations where a worker may live in one state, work in another, or travel across multiple jurisdictions in a week, compliance becomes significantly more complex. You must manage: minimum wage requirements differing by state/city, overtime rules by jurisdiction, tax withholding/residency/work-state issues, unemployment/worker‐comp jurisdictional issues. A robust solution will dynamically capture worker location info at onboarding and at each shift, determine applicable rules, and automate pay accordingly.
For W-2 employees you must ensure:
Also ensure you capture worker’s multiple work locations or shifts if they cross jurisdictions (for tax/withholding purposes).
At minimum you should:
You may also want to collect a Form I-9 from your workers and have their employment eligibility verified through E-Verify. While this is not required we are seeing that enforcement of employment eligibility varies by administration.
Worker classification hinges on the “employee vs independent contractor” analysis. Under U.S. Department of Labor (DOL) final rule effective March 11, 2024 (regulation at 29 CFR 795), six key factors apply:
In staffing/gig firms you must apply this test consistently and document your decision. Misclassification can lead to compliance violations and major fines (for example, for missing minimum wage or overtime protections when a worker should have been W-2).
For staffing companies and marketplaces working with gig or on-demand labor, the onboarding phase is a critical risk point. Key risks include: mis-classifying a worker (i.e., treating a W-2 employee as a 1099 contractor), failing to complete a compliant I-9 / E-Verify check for W-2 workers, not collecting correct tax forms (W-4 for employees, W-9 for contractors), lacking documentation of worker certifications or licenses, and failing to collect or monitor multijurisdictional data (worker’s residence, work location, shift locations) that will affect tax & wage compliance. Additionally, companies can use the onboarding process to mitigate other compliance risks such as displaying labor posters and onboarding to faster payment methods. By automating onboarding workflows you reduce manual errors, accelerate worker start-time, and build a more compliant foundation.
Share this:
Zeal is a financial technology company, not an FDIC insured depository institution. Banking services provided by Bangor Savings Bank, Member FDIC. FDIC insurance coverage protects against the failure of an FDIC insured depository institution. Pass-through FDIC insurance coverage is subject to certain conditions.
Mastercard® Debit Card is issued by Bangor Savings Bank, Member FDIC, pursuant to license by Mastercard International Incorporated. Mastercard is a registered trademark, and the circle design is a trademark of Mastercard International Incorporated. Spend anywhere Mastercard is accepted.
.avif)
