7.3 Other Federal and State Payroll Requirements

The rest of the hire-to-year-end file

AIPB's payroll skill list does not stop at FICA and Form 941. After you know employee versus contractor (Section 6.1), wage-hour rules (Section 6.2), W-4 and records (Section 6.3), and employee withholding (Section 6.4), the remaining operational duties still fail audits: Form I-9, new-hire reporting, information returns for nonemployees, state income-tax withholding, workers' compensation, and garnishments. None of these replace the employer FICA match in Section 7.1. Each has a different agency and a different penalty statute.

This independent OpenExamPrep section is study material for those other requirements. It is not an AIPB, USCIS, or IRS publication and does not claim official approval. Do not re-litigate common-law control tests here—if a stem is really about whether Kai is an employee, return to Chapter 6.

Form I-9 is immigration compliance, not a tax form

Form I-9, Employment Eligibility Verification, comes from U.S. Citizenship and Immigration Services (USCIS), not the IRS. Every employer must complete Form I-9 for each person hired to work in the United States (with limited exceptions). The form is retained in the personnel/I-9 file; it is not attached to Form 941, Form 940, or Form W-2.

Eligible employers using a DHS-authorized alternative procedure may examine documents remotely under current USCIS rules; otherwise the physical-document review requirement applies. Follow the current Form I-9 instructions and mark the alternative-procedure box when it is used.

Do not tell the employee which document to present from the Lists of Acceptable Documents. Do not complete Section 1 for the employee. Photocopies of documents, if you choose to keep them, do not replace a complete I-9. E-Verify is a separate DHS/SSA electronic check; it is not universally required of every private employer. Using E-Verify does not eliminate Form I-9.

North Finch illustration. Tessa Quinn's first day is Tuesday, October 6, 2026. She must finish Section 1 that day. North Finch must complete Section 2 by Friday, October 9, 2026 (three business days after the first day of employment), after physically examining original documents—or, if North Finch is eligible, completing the DHS-authorized alternative procedure. If Tessa later leaves on March 15, 2027, keep her I-9 until the later of October 6, 2029 (three years after hire) or March 15, 2028 (one year after separation)—so October 6, 2029.

An ICE I-9 inspection is not an IRS employment-tax audit. Mixing the two files—stapling I-9s to the 941 workpapers, or skipping I-9s because W-4s exist—is a bookkeeper failure the payroll test can still probe as "other requirements."

New-hire reporting feeds child support, not Form 941

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires employers to report new hires (and, in many states, rehires) to the State Directory of New Hires. Those reports flow to the National Directory so child-support agencies can issue income-withholding orders quickly.

Federal outer limit: report within 20 days of the hire date. Many states are shorter (7 or 10 days is common). Multi-state employers may designate one state for all new-hire reports if they follow that state's multi-state protocol. Typical data: employee name, address, SSN, hire date, and employer name, address, and FEIN.

New-hire reporting is not a substitute for Form W-4, Form I-9, or a state withholding certificate. It also is not optional because the employee asked to be paid as a contractor—if Chapter 6 says the worker is an employee, the new-hire clock started on the hire date.

Form 1099-NEC and backup withholding (contractors, not the payroll register)

Section 6.1 already placed independent contractors on Form W-9 and Form 1099-NEC, not Form W-2. This section is the information-return and backup-withholding layer.

2026 reporting threshold. Older bookkeeper notes still say $600. Publication 15 (2026) What's New: for reportable payments under section 6041(a) or 6041A(a) made in calendar year 2026 and subject to these rules, P.L. 119-21 increases the aggregate reportable-payment threshold from $600 to $2,000 (inflation-adjusted after 2026). Use the current-year threshold in the office and on the exam. Payments to corporations are often exempt from 1099-NEC, with exceptions (for example, some attorney payments). Follow the current 1099-NEC instructions rather than inventing a corporate exemption from memory.

Due date. Furnish Form 1099-NEC to the payee and file with the IRS by January 31. Do not put contractor compensation on Form 941 or Form W-2 if the worker is a nonemployee.

Backup withholding. Publication 15: generally withhold 24% of certain taxable payments if the payee fails to furnish a correct TIN (or the IRS notifies you to withhold). That withholding is backup withholding. Request the TIN on Form W-9. Backup withholding on nonemployee compensation is nonpayroll withholding: report it on Form 945, Annual Return of Withheld Federal Income Tax, and make separate deposits from Form 941 taxes. Do not dump backup withholding onto line 3 of Form 941 as if it were employee FIT.

North Finch illustration. A set designer who is a true contractor (Chapter 6 common-law result) invoices $3,400 in 2026 and provides a signed W-9 with a matching TIN. North Finch issues Form 1099-NEC for $3,400 (above the 2026 $2,000 threshold) and withholds $0 backup withholding. If the same designer refuses a TIN, backup withholding is 0.24 × $3,400 = $816.00, deposited on the Form 945 schedule, not added to Elena's Form 941 wages.

State income-tax withholding (where the state has an income tax)

Section 6.3 already treated state withholding certificates as a required payroll record. The employer duty is: if the employee's wages are subject to that state's (or locality's) income tax, withhold, deposit on that state's schedule, and file that state's withholding return and employee wage statements. Federal Form W-4 does not automatically satisfy a state that requires its own form.

Some states have no broad personal income tax; those employers still often have SUTA, workers' compensation, and sometimes local or disability withholding. Reciprocity agreements and telework can change which state gets the withholding. Do not invent a federal "state FIT rate." If a stem names a state, apply that state's published employer instructions.

Workers' compensation is usually insurance, not a federal payroll tax

Workers' compensation is typically a state-mandated insurance program that pays medical costs and wage replacement for work injuries. Premiums are often estimated on payroll by classification code, then audited. The cost is an employer expense (debit Workers' Compensation Expense, credit Cash or a premium payable / prepaid asset).

Workers' compensation is not FICA, not FUTA, and not reported on Form 941 or Form 940. Do not withhold it from employees unless a specific state statute shares a portion with employees (uncommon in many states; never assume a federal employee deduction). Do not call the premium "employer Medicare." A CB item that lists workers' comp next to OASDI is testing whether you can leave it off the 941 deposit.

Garnishments and child support are deductions, not employer taxes

A garnishment or income-withholding order tells the employer to take a stated amount (or a percentage of disposable earnings) from the employee's pay and send it to a court, state disbursement unit, or creditor. Child support orders generally have priority over ordinary commercial garnishments. The federal Consumer Credit Protection Act (CCPA) caps how much disposable pay may be taken; child-support orders use higher CCPA ceilings than ordinary creditor garnishments, with the exact cap depending on whether the employee supports another family and whether the support is in arrears. Follow the order's instructions and apply the limit under federal CCPA or state law that is more protective of the employee (generally the lower maximum withholding).

Accounting. Garnishments reduce net pay. They are not Payroll Tax Expense. On the wage-recording entry you credit Child Support Payable or Garnishment Payable instead of paying that slice to the employee. Remitting the money later debits the payable and credits Cash. If several orders compete, apply the legal priority (typically current child support first). Never "make the order work" by skipping the IRS deposit.

Jonah illustration (amounts for Section 7.4). Jonah's January 16, 2026 gross is $1,400.00. After FIT, FICA, and state income tax he would otherwise net $1,172.90. A child-support order requires $80.00 this period. Net pay to Jonah becomes $1,092.90, and $80.00 credits Child Support Payable. Employer OASDI, Medicare, FUTA, and SUTA are unchanged by the garnishment.

Exam traps. (1) Filing I-9 with Form 941. (2) Treating E-Verify as a replacement for I-9. (3) Putting contractor pay on W-2 because "we withheld 24%." (4) Reporting backup withholding on Form 941. (5) Using the 2025 $600 1099-NEC memory for 2026 payments without checking Publication 15. (6) Including workers' comp in the FICA match. (7) Debiting Payroll Tax Expense for child support. (8) Re-teaching FLSA overtime here instead of sending the item back to Section 6.2.