8.1 Federal Payroll Legislation: FLSA, FICA, FUTA, SUTA & Form W-4
Key Takeaways
- The Fair Labor Standards Act (FLSA) governs federal minimum wage ($7.25/hour), child labor restrictions, and mandatory 3-year (payroll records) and 2-year (timecards and wage rate tables) recordkeeping standards.
- The Federal Insurance Contributions Act (FICA) funds Social Security (6.2% on wages up to the annual statutory wage base) and Medicare (1.45% uncapped), with an additional 0.9% employee-only Medicare tax withheld once individual compensation exceeds $200,000.
- The Federal Unemployment Tax Act (FUTA) imposes an employer-only statutory gross tax of 6.0% on the first $7,000 of taxable wages per employee, which is reduced by the maximum 5.4% State Unemployment Tax Act (SUTA) credit to an effective net rate of 0.6% ($42 per employee annually).
- The redesigned Form W-4 eliminated personal withholding allowances in favor of a 5-step calculation incorporating filing status, multiple jobs, dependent credits, and explicit dollar adjustments.
- Form I-9 mandates that Section 1 be completed by the employee on or before their first day of work for pay and Section 2 by the employer within 3 business days of hire, with completed forms retained for 3 years after the hire date or 1 year after termination, whichever is later.
Last updated: August 2026
8.1 Federal Payroll Legislation: FLSA, FICA, FUTA, SUTA & Form W-4
Core Principle: Payroll accounting is strictly regulated by federal and state statutes designed to guarantee minimum compensation, protect minors, fund social safety nets, and ensure orderly tax collection. A Certified Public Bookkeeper must master the compliance triggers, tax rates, wage caps, and documentation rules under the FLSA, FICA, FUTA, SUTA, Form W-4, and Form I-9.
The Fair Labor Standards Act (FLSA) of 1938
The Fair Labor Standards Act (FLSA), enforced by the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL), is the primary federal statute regulating wages and hours worked. The FLSA applies to enterprises with at least $500,000 in annual gross sales volume or entities engaged in interstate commerce (including healthcare institutions, schools, and government agencies).
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| CORE PILLARS OF THE FLSA |
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| 1. FEDERAL MINIMUM WAGE |
| • Federal statutory floor: $7.25 per hour. |
| • Section 18(a) Supremacy Rule: When state or municipal minimum wage exceeds federal law, |
| the employer MUST pay the higher rate to all covered employees. |
| |
| 2. OVERTIME COMPENSATION |
| • Mandatory overtime premium of 1.5 times the Regular Rate of Pay for all hours worked |
| in excess of 40 hours during a standard 168-hour workweek. |
| |
| 3. CHILD LABOR PROVISIONS (Youth Employment) |
| • Under 14: Employment prohibited except in narrow exemptions (agriculture, delivery). |
| • Ages 14–15: Non-hazardous jobs with strict daily/weekly hour limitations. |
| • Ages 16–17: Unlimited hours in non-hazardous occupations (17 Hazardous Orders apply). |
| |
| 4. MANDATORY RECORDKEEPING |
| • Enforces 3-year and 2-year document retention schedules under 29 CFR Part 516. |
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Child Labor Regulations under FLSA
The FLSA establishes clear boundaries to ensure youth employment does not interfere with schooling or endanger physical health:
- Ages 14 and 15: Permitted in non-hazardous occupations (retail, food service, clerical). Hours are strictly limited to:
- Maximum 3 hours on a school day; maximum 8 hours on a non-school day.
- Maximum 18 hours during a school week; maximum 40 hours during a non-school week.
- Work permitted only between 7:00 AM and 7:00 PM (extended to 9:00 PM from June 1 through Labor Day).
- Ages 16 and 17: May work unlimited hours in any occupation not declared hazardous by the Secretary of Labor. Prohibited activities under the 17 Hazardous Occupations Orders include operating power-driven woodworking or metal-forming machinery, commercial motor vehicle driving, roofing, excavation, logging, and meat processing.
- Age 18 and older: No FLSA youth employment limitations apply.
FLSA Recordkeeping Schedules (29 CFR Part 516)
Employers must maintain detailed records identifying employees, their hours, compensation, and deductions. The retention periods are divided into two statutory tiers:
| Record Category | Statutory Retention Period | Required Documents Included |
|---|---|---|
| Core Payroll Records | 3 Years | Basic payroll registers, collective bargaining agreements, individual employment contracts, total sales/billing records, certificates of age. |
| Supplemental Time Records | 2 Years | Daily timecards, electronic badge logs, wage rate tables, work schedules, piecework production tickets, records of additions/deductions. |
Federal Insurance Contributions Act (FICA) of 1935
FICA taxes fund two vital federal social insurance programs: Old-Age, Survivors, and Disability Insurance (OASDI / Social Security) and Hospital Insurance (Medicare). FICA taxes are dual-funded through equal matching contributions from the employee and the employer.
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| FICA TAX STRUCTURE |
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| TAX COMPONENT | EMPLOYEE WITHHOLDING | EMPLOYER MATCH | TOTAL FICA | ANNUAL WAGE BASE |
+-----------------------+----------------------+----------------+------------+--------------------+
| Social Security | 6.2% | 6.2% | 12.4% | Statutory Cap |
| (OASDI) | | | | (Indexed Annually) |
+-----------------------+----------------------+----------------+------------+--------------------+
| Medicare | 1.45% | 1.45% | 2.90% | NO CAP (Uncapped) |
| (Hospital Insurance) | | | | |
+-----------------------+----------------------+----------------+------------+--------------------+
| Additional Medicare | 0.90% | 0.00% | 0.90% | Over $200,000 YTD |
| (Affordable Care Act)| (Employee Only) | (No Match) | | (Per Employer) |
+-----------------------+----------------------+----------------+------------+--------------------+
Additional Medicare Tax Compliance Rules
Under the Affordable Care Act (IRC § 3101(b)(2)), employers are legally required to withhold an Additional Medicare Tax of 0.9% on all compensation paid to an individual employee in excess of $200,000 in a calendar year.
- Employer Withholding Trigger: Withholding begins in the pay period in which the employee's year-to-date wages with that specific employer exceed $200,000, continuing through year-end.
- No Employer Match: The employer owes zero matching tax on the 0.9% portion.
- Filing Status Neutrality: The employer must withhold at the $200,000 threshold regardless of the employee's tax filing status, even if the employee is married and their combined household threshold is $250,000 (or $125,000 if married filing separately). The employee reconciles any excess or deficient withholding on IRS Form 8959 with their Form 1040.
Unemployment Taxes: FUTA and SUTA
Unemployment insurance is a joint federal-state program providing temporary income replacement to workers who lose their jobs through no fault of their own.
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| FUTA & SUTA TAX INTERACTION MECHANICS |
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| STATUTORY GROSS FUTA RATE: 6.0% on the first $7,000 of taxable wages per employee/year |
| MAXIMUM SUTA TAX CREDIT: -5.4% (Granted for timely state unemployment contributions) |
| ───────────────────────────────────────────────────────────────────────────────────────────── |
| EFFECTIVE NET FUTA TAX RATE: 0.6% ($7,000 × 0.006 = Maximum $42.00 per employee per year) |
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FUTA Tax (Federal Unemployment Tax Act)
- Employer-Only Tax: FUTA is strictly an employer liability. It is never deducted or withheld from employee paychecks.
- Wage Base: Applied to the first $7,000 of gross taxable wages paid to each employee during the calendar year. Once an employee's cumulative year-to-date compensation reaches $7,000, subsequent earnings in that calendar year are exempt from FUTA.
- Credit Reduction States: If a state borrows funds from the federal Unemployment Trust Fund (Title XII advances) to pay benefits and fails to repay the balance within the statutory window (typically two consecutive Januaries), the federal government reduces the 5.4% FUTA tax credit by 0.3% per year (e.g., credit drops to 5.1%, raising net FUTA to 0.9%), increasing the employer's net federal tax rate until the state's loan is retired.
SUTA Tax (State Unemployment Tax Act)
- State Wage Bases: Most states establish unemployment wage bases significantly higher than the federal $7,000 minimum (e.g., $10,000 to over $40,000 depending on state law).
- Experience (Merit) Rating: State SUTA tax rates vary by employer based on their historical experience rating—the volume of unemployment benefits collected by former employees relative to the employer's total taxable payroll. Employers with stable workforces and minimal layoffs earn lower SUTA tax rates, whereas employers with high turnover face higher statutory rates.
Form W-4: Employee's Withholding Certificate
Following the Tax Cuts and Jobs Act (TCJA), the Internal Revenue Service fundamentally redesigned Form W-4. The form completely abolished personal withholding allowances (e.g., claiming "0", "1", or "2" allowances) in favor of a 5-step, transparent dollar-based calculation.
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| REDESIGNED FORM W-4 ARCHITECTURE |
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| STEP 1: PERSONAL INFORMATION & FILING STATUS (Mandatory) |
| • Name, Address, Social Security Number. |
| • Marital Status: Single / MFS, Married Filing Jointly / QSS, or Head of Household. |
| |
| STEP 2: MULTIPLE JOBS OR WORKING SPOUSE (Optional / Situational) |
| • Used if the employee holds more than one job simultaneously, or is married filing jointly |
| and both spouses work. Configured via: |
| (a) IRS Tax Withholding Estimator online, |
| (b) Multiple Jobs Worksheet (Step 4(c) extra withholding), or |
| (c) Checkbox Step 2(c) (applied when two jobs have roughly similar compensation). |
| |
| STEP 3: CLAIM DEPENDENTS & OTHER TAX CREDITS (Optional) |
| • Multiplies qualifying children under age 17 by $2,000 each. |
| • Multiplies other dependents by $500 each. |
| • Reduces annual tax withholding dollar-for-dollar based on the entered total. |
| |
| STEP 4: OTHER OPTIONAL ADJUSTMENTS |
| • 4(a) Other Non-Wage Income: Increases withholding for unearned interest, dividends. |
| • 4(b) Deductions: Reduces withholding for itemized deductions exceeding standard deduction. |
| • 4(c) Extra Withholding: Direct dollar amount added to withholding EACH pay period. |
| |
| STEP 5: SIGNATURE & DATE (Mandatory) |
| • Employee signs under penalties of perjury. Unsigned forms are legally INVALID. |
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Critical Form W-4 Operating Rules for Bookkeepers
- Default Withholding Rule: If a newly hired employee fails or refuses to submit a valid, signed Form W-4, the bookkeeper must withhold federal income tax based on a default status of Single or Married Filing Separately with zero adjustments in Steps 2, 3, and 4.
- Exemption from Withholding: An employee may claim total exemption from federal income tax withholding only if they meet two strict conditions: (a) they had no federal income tax liability in the preceding tax year, and (b) they expect to have zero tax liability in the current tax year. Exemption claims expire annually on February 15; the employee must submit a new Form W-4 annually to maintain exempt status.
- Employer Inability to Advise: Bookkeepers and payroll clerks are legally prohibited from advising employees on how to fill out Form W-4 or recommending specific dollar amounts. Bookkeepers may only direct workers to the official Form W-4 instructions and the IRS Tax Withholding Estimator.
Form I-9: Employment Eligibility Verification
Enacted under the Immigration Reform and Control Act (IRCA) and administered by U.S. Citizenship and Immigration Services (USCIS), Form I-9 is mandatory for every employee hired in the United States to verify their identity and authorization to work.
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| FORM I-9 TIMELINE AND RETENTION RULES |
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| SECTION 1: EMPLOYEE ATTESTATION |
| • Completed and signed by the employee NO LATER THAN the first day of employment for pay. |
| |
| SECTION 2: EMPLOYER REVIEW & VERIFICATION |
| • Employer must physically examine original, unexpired documents and complete Section 2 |
| WITHIN THREE (3) BUSINESS DAYS of the employee's first day of work for pay. |
| (Example: Employee starts Monday; Section 2 must be fully certified by Thursday). |
| |
| DOCUMENT RETENTION MANDATE |
| • Retain completed Form I-9 for: |
| THREE (3) YEARS from the date of hire OR ONE (1) YEAR after termination, whichever is LATER|
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The Document Selection Framework
Employees have the statutory right to choose which acceptable documents to present. Employers cannot specify or demand particular documents:
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| ACCEPTABLE I-9 DOCUMENTS MATRIX |
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| LIST A | LIST B | LIST C |
| (Identity & Work Authorization) | (Identity Only) | (Work Auth. Only) |
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| • U.S. Passport or Passport Card | • State Driver's License or | • Unrestricted Social |
| • Permanent Resident Card (Form | State ID Card with photo | Security Card (No |
| I-551 'Green Card') | • School ID Card with photo | employment limits) |
| • Employment Authorization Document | • Voter Registration Card | • Certified Copy of |
| with Photo (Form I-766) | • U.S. Military ID Card | Birth Certificate |
| • Foreign Passport with I-551 stamp | • Military Dependent ID | • Consular Report of |
| or Form I-94 work authorization | • Native American Tribal Doc | Birth Abroad (FS-240)|
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| RULE: Employee presents EITHER ONE document from List A OR ONE List B PLUS ONE List C. |
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Test Your Knowledge
Under FLSA recordkeeping regulations (29 CFR Part 516), how long must an employer retain (1) basic payroll records/registers and (2) daily employee timecards?
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Test Your Knowledge
An employee earns $260,000 in gross wages from a single employer during a calendar year. How is the Additional Medicare Tax of 0.9% calculated and handled for payroll tax compliance?
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D
Test Your Knowledge
An employer in a state with no FUTA credit reduction pays timely state unemployment taxes on an employee whose gross wages for the year are $35,000. What is the employer's net FUTA tax liability for this employee?
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Test Your Knowledge
An employee was hired on March 1, 2023, and separated from employment on June 30, 2025. Under federal immigration regulations, what is the earliest date the employer may legally dispose of this employee's Form I-9?
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