Chapter 15 PAYROLL 15-1

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1 Chapter 15 PAYROLL Payroll responsibility varies from municipality to municipality. In smaller municipalities the Clerk- Treasurer is responsible for payroll preparation and maintenance of records. In larger municipalities there may be a payroll section under the direction of a Finance Officer. So this section of the Handbook is general information describing payroll files that should be kept, types of deductions, remittance of deductions and state statutes mandating procedures relating to payrolls. If more detailed information is needed, such as setting up a new payroll, you should contact the Internal Revenue Service Center, the New Mexico Taxation and Revenue Department, and the Local Government Division of the New Mexico Finance and Administration Department. PAYROLL FILES Certain documents are necessary to add people to the payroll, to establish deduction rates and to compute what gross pay for each pay period should be. Although a few of these documents may wind up the employee's personnel file (see Chapter 24), some of them should have either the original or a copy in the employee's payroll file so that they may be audited. Some of the typical items in a payroll file would be: 1. Social Security Social Security (FICA), a federal nationwide retirement system, is a fixed percentage which must be deducted from each paycheck until a fixed limit of accumulated gross income is reached. Each deduction is equally matched by an employer contribution and both are submitted periodically to the Internal Revenue Service. Submission requirements vary according to the amount of withholding per pay period. The requirements are available from IRS Circular E. (This document is available online at sss.irs.gov/pub/irs/pdf/p15.pdf). Most municipalities have chosen to have their employees covered by Social Security but some have not. Effective July 1, 1991, any employee or elected official who is not covered by PERA or another retirement plan must contribute to both Social Security and Medicare. An employee's Social Security number must be in that employee's payroll file. It is recorded at time of hire and appears on certain other documents such as the tax withholding authorizations. 2. Medicare Every employee hired or elected official elected or appointed after July 1, 1986, must pay the Medicare tax even if he or she is not covered by Social Security (FICA). 3. Tax Withholding Forms Each municipality is required by law to withhold designated amounts of personal income tax for the U.S. government and the State of New Mexico. Each employee must complete and sign a form stating how many exemptions he/she wishes to claim. The appropriate withholding rate for that number of exemptions and that pay level is then withheld from each pay check. Tax withholding instructions for employers are available from the U.S. Internal Revenue Service 15-1

2 15-2 and the New Mexico Bureau of Revenue. 4. Benefit Deductions Most employment benefits are paid on a monthly basis, whether they are deducted from each paycheck, or alternate paycheck. While the cost of most benefits is shared by employer and employee, some municipalities pay the total cost of certain benefits (usually employee's individual life insurance). Check your local policy. 5. Retirement Any municipality may join the Public Employees Retirement Association of New Mexico by passing a resolution to do so and submitting it to PERA. Deductions and contributions are submitted monthly to PERA of New Mexico, Santa Fe. Complete benefit and procedural information is available from PERA. Some municipalities have chosen to provide retirement through other retirement plans offered by private carriers. Employee deductions and employer contributions (if any) to these plans are also submitted monthly to the carrier. Check your local policy for procedures and rates. Applications should be retained for audit purposes. 6. Insurance Application and Certificate Most municipalities offer medical and hospital insurance, major medical insurance, and life insurance for employees, and in most cases, employees' families. All are handled by private carriers. Costs of premiums for these coverages are usually shared by employer and employee in differing proportion depending upon local policy. Municipalities are authorized to pay up to 100% of cost, but most pay a lower percentage, with the remainder paid by payroll deduction from the employee's gross pay. Check your local policy and contact the carrier for benefits and rates. Applications authorizing employee deductions are part of the audit trail. 7. Cafeteria Benefit Plans Some municipalities offer variable choice benefit plans (cafeteria plans) through a payroll reduction system in which the amount going to the plan is taken from the employee's gross pay before payroll taxes are computed. The employee signs an agreement as to the amount of reduction and a document showing which benefits s/he has chosen to have the reduction applied to. Copies of these should be in the employee's payroll file. Check your local policy. 8. Voluntary Deductions Other deductions are allowed by many municipalities for such purposes as U.S. Savings Bonds, charitable contributions, credit unions, or other municipally allowed reasons. Check your local policy. The employee's authorization for all such deductions must be maintained for audit purposes. 9. Union Dues Deduction If your municipality has one or more collective bargaining agreements with some or all of its employees, the agreement(s) may provide for payment of union dues by payroll deduction

3 (sometimes called "dues check off"). An authorization to deduct the dues, signed by the employee, should be part of the employee's payroll file. 10. Garnishment Like private employees, public employees are subject to garnishment of wages upon court order in a civil action. The garnishment deducted may not exceed 25% of disposable income (gross pay minus legally mandated deductions such as taxes, FICA, and PERA) or the remainder of disposable income per week when reduced by 40 times the Federal minimum wage. 11. Personnel Actions The form, letter, or note which authorizes adding or removing someone on the payroll or establishes or changes the pay rate, and contains the signature or initials of the appointing authority or his designate must be retained in the employee's payroll file. Sometimes this is an extract from the minutes of the governing body. 12. Time and Attendance Record This is a record of the number of hours worked, hours absent or hours of leave used and pay rate of the employee. It is the basis on which the payroll is calculated. Some jurisdictions use a time sheet, some use time cards, some use exception reports. Whatever the method, the supervisor or department head certifies that Employee A is to be paid for so many hours of work, so many hours of overtime and/or so many hours of paid leave, or that so many hours are to be subtracted for such and such a reason. It is just as important to keep accurate records of paid and unpaid absences as of hours worked. Since all municipalities are covered by the federal minimum wage and overtime law, the Fair Labor Standards Act, you must keep accurate records of time and attendance on all employees, even those you may consider exempt from overtime premiums under FLSA. Each municipality should be familiar with the basic regulations and requirements of the Fair Labor Standards Act. Basic information can be downloaded at Although employee absences and leave approval are the direct responsibility of the supervisor and the department head, an official leave record on each employee should be kept in the Clerk- Treasurer's office or the personnel office if the chief administrator or the governing body so desires. There are probably more disputes about leave balances than any other single personnel item. PAY DAYS Under state law ( ), pay days may be no less often than every 16 days, provided that the employer shall pay for services rendered from the first to the fifteenth days inclusive, of any calendar month, by the 25th day of the month during which the services are rendered and for all services rendered from the sixteenth to the last day of the month inclusive, of any calendar month, by the 10th day of the succeeding month ( A NMSA 1978). Employers shall pay such wages in full, less lawful deductions and less payroll deductions authorized. Payment of wages may be made at more frequent intervals if desired ( B NMSA 1978). 15-3

4 Some municipalities pay twice per month; others pay every two weeks. Check your local policy. Pay days must be within 10 calendar days of the last day of the period for which paid, except that a discharged employee must be paid within five days after discharge if he/she requests it. An employee who resigns does not have to be paid until the next regular payday. Records of hours worked and wages paid must be kept on every employee. The employer shall keep records on file for at least one year after the entry of the record. Payroll records may be kept longer than required by statute at the discretion of the governing body. Longer retention may be useful if questions arise on unemployment compensation or retirement credit. The municipal clerk, or other individual responsible for payroll, should explain what deductions will be withheld from an employee's paycheck, the frequency of payroll and options (if any) available for withholding. All forms authorizing deductions should be signed by the employee on the first day of employment. The following deductions are most commonly withheld: Federal Withholding Tax 2. State Withholding Tax 3. Social Security (F.I.C.A.) 4. Medicare tax 5. Group insurance premiums 6. Retirement Each deduction is briefly described in the following pages. PAYROLL DEDUCTIONS Group Insurance Section NMSA 1978 states that each municipality shall provide a group term life, medical or disability income insurance for the benefit of eligible employees or salaried officers of the municipality. The municipality may pay up to 100%, any fraction of 100% or none of the insurance premium. This is a determination by the governing body based on the financial ability of the municipality. The only statutory mandate is that the municipality must provide a program of group term life, medical or disability income insurance. Participation in a group plan by a municipal employee is optional. The municipal clerk or other individual responsible for payroll should explain the group plan and (if any) options available to the new employee. The employee must enroll in the plan for the municipality or premiums cannot be deducted from the employee's payroll check. The municipality must take care that regular payment of premiums is made to the insurance company carrying the group plan to ensure than no lapse in coverage occurs because of non-payment of premiums. Federal Withholding Tax All salaries are subject to Federal Withholding Tax with few exceptions. Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment. When an employee does not give you a completed Form W-4, withhold tax as if he or she

5 were single, with no withholding allowances. A Form W-4 remains valid until a new one is furnished. (For a list of exemptions to withholding see the Employer's Tax Guide - IRS Circular E. If you do not have a copy, write for one to Internal Revenue Service Center, Austin, Texas 73301, call toll-free at , or download Circular E at Withheld federal income taxes are deposited in an authorized financial institution or a Federal Reserve Bank. Include a pre-inscribed Federal Tax Deposit Form 501 with each deposit. The amount of taxes determines the frequency of deposits. You owe these taxes when you pay the wages, not when your payroll period ends. (For detail of withholding deposits see the Employer's Tax Guide.) State and local government employers deposit federal withholding income tax and Social Security and Medicare taxes with IRS. If you do not have Federal Tax Deposit forms, write or call the Internal Revenue Service Center, or go to Be certain to give them the name of the municipality, employer identification number, address and periods for which the forms are needed and the kind of tax to be deposited. State Withholding Tax Municipal employees' wages are subject to a state withholding tax. Tax computation and payment forms are available from the New Mexico Taxation and Revenue Department, P.O. Box 630, Santa Fe, New Mexico You can find these forms at The total state withholding taxes withheld from employees' salaries and wages must be reported and paid to the Revenue Division of the New Mexico Taxation and Revenue Department by the 25th day of the month following the month for which the taxes are reported. Social Security Coverage Most municipalities are covered under the Social Security program. The municipality is responsible for reporting the amount of wages and paying the social security contributions with respect to the wages paid to the Internal Revenue Service, which acts as collector for the Social Security Administration. All questions pertaining to social security coverage - reporting of wages, record keeping, and eligibility should be referred to the IRS. Information requests regarding service credited to an individual's earnings record, monthly benefits, disability or death benefits, should be obtained from the nearest Social Security District office. Details of Social Security withholding and reporting are contained in IRS Circular E - Employers Tax Guide, available from the Internal Revenue Service Center (address and phone number on page 15-5). Retirement Coverage Retirement coverage at present is not mandatory for municipalities and can be provided either through the private sector or through the Public Employees' Retirement Association (PERA). 15-5

6 PERA Coverage Once the municipality has elected to affiliate with PERA, membership coverage for those employees hired after date of coverage and all employees who have been PERA members elsewhere is mandatory and required as a condition of employment. Employees on board at the time of initial coverage may elect not to join. Certain exemptions can be made for those employees who are employed in a temporary or seasonal position and who have not been previous members of PERA. PERA Employee Contributions Employee contribution percentage is dependent upon the retirement option plan pertaining to that employee. The defined percentage is deducted and transmitted to PERA each and every month for regular employees. The deductions should not include compensations paid on overtime, allowances for clothing, housing, equipment or travel, nor payments for unused sick leave. Every month as contributions are remitted to PERA, they are credited to the member's individual account which is referred to as the "Employee's Savings Fund." PERA Employer Contributions The employer, likewise, "matches" the contributions deducted from regular pay of each member each month. The percentage matched by employer contribution depends upon the retirement plan option pertaining to that employee. The employer contributions paid in each month are credited to the "Employers' Accumulation Fund" which is a pooled fund and is used to pay the benefits for those who remain in service to retirement. The employer contributions are not refundable when employment terminates. Other Retirement Plans The employee deduction and the employer matching contribution are those defined in the agreement which the municipality makes with the retirement policy carrier. Check your local policy to find out what those rates are. Unemployment Compensation Each News Mexico municipality which employs people for twenty weeks or more in a calendar year is responsible for unemployment compensation payments if claims are paid. Your payroll responsibilities in regard to unemployment compensation are threefold: 1) quarterly reporting of persons paid during the quarter, 2) transmittal of funds paid by the municipality as an employer, and 3) checking notices of claims by past employees against your payroll and personnel records. Each quarter you will receive a reporting form from the Employment Service Division (ESD) of the New Mexico Department of Labor. On the form you are required to list each employee (but not elected officials) who has been paid during that calendar quarter and the total wages paid. All wages for each employee up to a given dollar amount are subject to Unemployment Compensation payments (see next section). That dollar amount under New Mexico law may be no less than $17,900 per calendar year, but may be more depending upon what the statewide average wages for the previous year happened to be. Once an employee's cumulative wages for the calendar year reach that dollar amount, any wages in excess are not subject to UC. Complete instructions for completion are on the form itself. The form must be returned to Employment Services Division before the end of the month following the close of 15-6

7 the calendar quarter (by April 30, July 31, October 31, and January 31, respectively) or the employer is subject to penalties. You may file reports online at UItax.html. Public employers may either "contribute" payments based on a percentage of wages paid, which must be transmitted along with the quarterly report, or may reimburse for actual claims paid to former employees during the previous quarter. Unemployment compensation payments are from the employer only; no deductions from the employee's pay are permitted. Those which chose to reimburse may do so directly to Employment Services or may pool with another public entity or may belong to a state-run pool, the Local Public Body Unemployment Compensation Reserve Fund, which is administered by the Risk Management Division of the New Mexico Department of Finance and Administration. Your municipality may change from one payment option to another but only at two calendar year intervals. If your municipality belongs to the DFA pool, you may get complete instructions and assistance from the Risk Management Division, telephone in Santa Fe. If your municipality is "contributing" a percentage of wages paid or is reimbursing directly, you may get helpful publications and answers to specific questions from the Unemployment Insurance Tax Bureau in Albuquerque, telephone , or from the Employment Service field office nearest you (Check your telephone book.) Checking Claims Notices If any person who was employed by your municipality within the past eighteen months files a claim for unemployment compensation, you will receive a notice from the Employment Services Division. (If you belong to the Risk Management pool, the notice goes to Risk Management.) If your municipality was the most recent employer, you will receive a copy of the claim itself; if not the most recent employer, you will receive a Notice to Employer of Claim Determination. In either case, note the date on which Employment Services sent the form to you. You must complete and return the claim copy within five days, the Notice within fifteen days. If you miss the deadline or fail to reply, you lost any chance to dispute the claim. As soon as possible, check the claim or the Notice against your records, paying careful attention to the following items: 1. Claimant's name 2. Claimant's social security number 3. Beginning and ending dates of employment with your municipality 4. Reason for termination The reasons for this checking should be obvious: a. The date sent will tell you how soon it needs to be returned to ESD. If that date has passed, immediately call the Employment Service office from which it originated so that you have a chance to remain a party to the determination. Also enclose a note to that effect with the form when you return it. b. Claimant's name and social security number are quite important--the claimant may not be even be an ex-employee of yours. Name alone is not an adequate check, especially with the accidental as well as the intentional replication of both family names and given names in New 15-7

8 Mexico. The social security number is the locator number in ESD's computers and even a onedigit mistake may charge the wrong employer's account. c. Beginning and ending dates of employment have a lot to do with the amount of your liability. If the employee terminated more than eighteen months ago, you are not chargeable for the claim. d. Reason for termination is a basis for determining the claimant's eligibility. The form requests that you state the reason for termination to the best of you knowledge. If, according to your records, the claimant: a. quit his work with you voluntarily for any reason not attributable to you; OR b. was discharged by you for misconduct connected with his work; you should note the reason on the back of the form and mail it immediately to ESD. Your quick response and the adequacy of your records are key factors in avoiding payment of unjust claims and thus saving unnecessary expense to the municipality. Workers' Compensation New Mexico law requires that all municipalities provide compensation to employees injured on the job ( through ). Although such risks may be self-insured by establishing a reserve fund, most municipalities either purchase insurance from private carriers or belong to the New Mexico Self Insurers' Fund, which is a non-profit, member-owned insurance pool. Premiums must be submitted in accordance with contract. In addition to the employer-paid Workers' Compensation coverage, each employee pays a $2 fee each calendar quarter by payroll deduction. This is matched by $2.30 from the employer. This assessment must be verified as budgeted when submitting your annual budget to DFA. Further information can be downloaded at Workers' Compensation award decisions are administered by the state Commissioner of Labor and are subject to administrative challenge and court adjudication. YEAR-END PAYROLL RESPONSIBILITY By January 31, give a Form W-2 to each employee from whom you withheld income tax in the previous calendar year and to each employee that you would have withheld income tax from if the employee had claimed no more than one withholding allowance. Use the W-2 form to report all other compensation you pay an employee. These amounts are included in the gross income but are not subject to income tax withholding. (This compensation applies to cash or non-cash payments such as housing or subsistence. Add the total of all payments in the proper box on Form W-2.) If you have a payroll system making it difficult to combine other compensation with wages, you may file two Forms W-2. One can show wages and the other can show other compensation. (For a list of other compensation please refer to the Employer's Tax Guide.) 15-8

9 W-2 forms and any corrected statements are due to employees for the calendar year by January 31 of the following year. If an employee resigns and will not be returning to work before the end of the year, give that individual a copy of the statement not later than 30 days after the last wage payment, being certain to retain a copy of the form to file at the end of the year. You must send a copy of the W-2 form to the proper agency by February 28 of the year following the reported year. In New Mexico you will need to send a copy to the Internal Revenue Service and a copy to the Taxation and Revenue Department. The municipal clerk or individual responsible for the year end report should be certain that the report and the attached forms balance. 15-9