Operational Gaze:
How to Run Payroll in Arkansas?

January 19th 2024

Running payroll is a fundamental and multifaceted aspect of managing any business, regardless of size or industry. It’s a vital process that encompasses various tasks, from calculating employee wages and managing deductions to submitting the right payroll forms and paying the required taxes. To add to the complexity of this process, employers in Arkansas also have to comply with a mix of state and federal policies. It can easily make anybody’s head spin.

No need to worry, though, because this guide is designed to provide a clear and step-by-step approach to navigating the intricacies of running payroll in Arkansas. We’ll cover everything from relevant labor laws, payroll taxes, key elements that can impact your payroll process, and plenty more. By the end of this guide, you’ll have the knowledge and confidence to manage your payroll effectively and stay on the right side of both state and federal laws.

This Article Covers

Laws That Affect Payroll Procedures in Arkansas
Worker Classifications in Arkansas

Payroll Forms and Relevant Bodies in Arkansas

Applicable Taxes in Arkansas
Key Pay Elements That Impact Payroll in Arkansas
Step-by-Step Guide to Payroll in Arkansas

Laws That Affect Payroll Procedures in Arkansas

Payroll procedures in Arkansas are influenced by both state and federal laws. These laws set rules for things like minimum wage, overtime, tax withholding, and child labor. Compliance with these laws is essential to avoid legal headaches and ensure all your employees are fairly compensated.

Arkansas Laws

  • The Arkansas Code: The Arkansas Code encompasses a comprehensive body of state laws that cover a wide range of legal matters, including civil and criminal statutes, regulations governing various industries, rules for government operations, and provisions related to taxation, education, and healthcare. It’s the official record of laws passed by the Arkansas General Assembly, helping to maintain order and guide how things work in the state.
  • The Arkansas Minimum Wage Act: The Arkansas Minimum Wage Act applies to employers with four or more employees. Arkansas’ current minimum wage is set at $11.00 per hour, which is higher than the federal minimum wage of $7.25.
  • Paid Breaks or Lunch Period: Employers are not obligated by state or federal wage and hour laws to give breaks or meal periods, except for children under 16 working in the entertainment industry following state law. However, short rest breaks are common in many industries, typically 20 minutes or less, to boost productivity. As per the Department of Labor (DOL), these short breaks must be paid.
  • Pay periods: In Arkansas, companies have to pay their employees twice a month. However, larger corporations making $500,000 or more annually can pay certain higher-level exempt employees earning over $25,000 yearly at least once a month. This rule is outlined in Arkansas Statute 11-4-401.
  • Paid Time Off and Leaves: In Arkansas, employers are not obligated to offer vacation or sick leave, whether paid or unpaid. If they offer these benefits, they must follow the rules in their company policy or employment agreement.
  • Payroll Recordkeeping: As per Arkansas Admin. Code 235.01.1-102, every employer must keep accurate payroll records for each employee, including their full name, address, date of birth (if under 19), gender, and occupation. It should also include the start day and time of the employee’s workweek if it’s the same for everyone in the workplace. 
  • Payroll Taxes: Arkansas employers are subject to various state taxes such as State Unemployment Insurance (SUI) and income tax. The individual income tax rate in the state is currently at 4.7%, and the top corporate income tax rate at 5.1%.
  • Final Pay: When a company fires an employee, they must pay the employee on the next regular payday. If they don’t pay within seven days of that payday, they owe the employee double the unpaid wages.

Federal Laws

  • Fair Labor Standards Act: The FLSA is a crucial federal law that sets rules for how much employees should be paid per hour and for overtime. It also explains how workers should be categorized, the rules for minor workers, and how to keep track of work hours.
  • Family and Medical Leave Act (FMLA): The FMLA is another important federal law governing time off from work. It allows eligible employees to take up to 12 weeks of unpaid leave for reasons such as childbirth, adoption, or caring for a seriously ill family member.
  • Federal Insurance Contributions Act (FICA) Tax: The FICA is a U.S. federal payroll tax. It’s paid by both employees and employers to support Social Security and Medicare, which offer benefits to retirees, people with disabilities, and the children of deceased workers.

HR Laws

  • Child labor requirements: Arkansas child labor laws mandate that kids as young as 14 can work on non-dangerous jobs. These rules are in place to safeguard minors while offering them a chance to learn at work while they’re in school. For the initial 90 days of employment, federal law permits Arkansas employers to pay employees under 20 years old a training wage of $4.25 per hour.
  • Posting requirements: Employers with four or more employees are required to post notices informing employees of Minimum Wage, Overtime, Child Labor, and Wage Collection standards. There are also different posting requirements set by other state and federal laws. You can learn more about required postings from the Arkansas Department of Labor and Licensing.
  • Arkansas new hire reporting: Arkansas employers must notify the Arkansas New Hire Reporting Center about all new or rehired workers within 20 days of their start date. You can complete the Arkansas New Hire Reporting Form online or by sending it by mail to their main office.

Worker Classifications in Arkansas

Properly classifying workers is crucial as it determines various aspects of employment, including tax obligations, benefits eligibility, and legal responsibilities. 

Workers can be classified as either employees or independent contractors based on their relationship with an employer and the role they perform within the company. To classify them correctly, employers in Arkansas mainly use the IRS 20-factor test, sometimes called the Common Law test.

Employees vs Contractors

Employees typically have a more structured work relationship with their employers. They often work under direct supervision, follow set schedules, and use company-provided resources such as tools, equipment, and workspace. Employers are responsible for withholding income taxes, Social Security, and Medicare contributions from employees’ paychecks. They are also required to provide certain benefits, including workers’ compensation insurance, unemployment insurance, and, in some cases, healthcare coverage, paid leave, and retirement plans. 

In contrast, independent contractors in Arkansas enjoy greater autonomy in how they perform their work. They are typically hired to complete specific projects or tasks and often use their tools and equipment. Independent contractors are responsible for managing their own tax obligations, including income tax payments and self-employment taxes. They also are not entitled to employee benefits like workers’ compensation, unemployment benefits, or employer-sponsored healthcare and retirement plans. 

The distinction between employees and independent contractors is critical. Misclassifying an employee can mean significant legal and financial consequences for employers. 

IRS 20-factor test

In 2019, Arkansas made changes to its employment laws with HB1850, known as the Employer Independent Contractors Act of 2019. This law now supports using the IRS 20-factor test from Revenue Ruling 87-41 (1987-1 C.B. 296) to decide if someone is an employee for things like wage determination, income tax withholding, and workers’ compensation insurance. It also replaces the previous ABC test that was used for unemployment insurance purposes with the IRS 20-factor test.

This test focuses on the concept of “direction or control,” which assesses how much control a business has over a worker.

Other factors distinguishing employees from contract workers include:

  • Independent contractors decide when, where, and how they work.
  • Employees receive training, whereas independent contractors are already skilled.
  • Contractors can hire their own help.
  • Contractors are usually paid per job, while employees receive hourly wages.
  • Employers provide tools for employees, but independent contractors use their own.
  • Contractors manage their own businesses, can make profits or losses, and can work for multiple businesses and the public.
  • Employees can be terminated or leave without consequences, but contractors can only be released if they fail to meet contract terms.

Depending on your business, not all 20 factors of this test may apply. Nevertheless, it offers a starting point for understanding how Arkansas may classify workers providing services for your business. For further understanding of the entitlements of both salaried and hourly employees, individuals can refer to our articles on your rights as a salaried employee in Arkansas, and your rights as an hourly employee in Arkansas.

Payroll Forms and Relevant Bodies in Arkansas

Arkansas Payroll Forms

Federal Payroll Forms

  • W-4 Form: Helps employers calculate employee tax withholdings.
  • W-2 Form: Shows yearly wages for each employee.
  • W-3 Form: Summarizes annual wages and taxes for all employees.
  • Form 940: Computes and reports IRS unemployment taxes.
  • Form 941: Submits quarterly income and FICA tax withholdings.
  • Form 944: Submits yearly income and FICA tax withholdings.
  • 1099 Forms: Offers pay details to contractors for tax calculations.

Federal and Arkansas Payroll/ Tax Bodies

  • Arkansas Workers’ Compensation Commission: The Arkansas Workers’ Compensation Commission (AWCC) plays a pivotal role in the state’s workers’ compensation system, ensuring that injured workers and employers receive fair and equitable treatment. Their mission is to carry out and uphold the state’s Workers’ Compensation Law following the Constitution and legislative enactments.
  • Arkansas New Hire Reporting Center: The Arkansas New Hire Reporting Center is responsible for collecting and managing information about newly hired employees in the state. When employers hire new workers, they are required to report certain details about these employees to the center.
  • Arkansas Division of Workforce Services (ADWS): The ADWS is the state’s agency for helping unemployed residents find jobs. They offer training, process unemployment claims, and connect job seekers with employment opportunities in the state.
  • Internal Revenue Service (IRS): You’ll do a lot of your payroll processes with the IRS. It’s a U.S. government agency under the Department of the Treasury, and it oversees federal tax rules.  The IRS also collects taxes, manages tax forms, and conducts tax audits to make sure people and businesses follow tax laws and pay their taxes.
  • Social Security Administration (SSA): The SSA runs programs for retirement, disability, survivor benefits, and family support. They also assist people in signing up for Medicare. The SSA is also the government body responsible for issuing Social Security Numbers, which are crucial for employment, finances, and accessing government services.
  • Wage and Hour Division (WHD): The WHD is a part of the U.S. Department of Labor. Its main job is to ensure employers follow labor standards to protect workers’ rights. WHD enforces laws like the Fair Labor Standards Act, which covers things like minimum wage, overtime pay, recordkeeping, and child labor rules. It also enforces other laws like the Migrant and Seasonal Agricultural Worker Protection Act, Employee Polygraph Protection Act, and the Family and Medical Leave Act.

Applicable Taxes in Arkansas

Arkansas imposes various taxes to support its state and local government functions. Understanding these applicable taxes is essential for both residents and businesses operating within the state. Here’s an overview of some of the key state and federal taxes you need to take note of:

State Taxes

  • Income Tax: On April 10, 2023, Arkansas Governor Sarah Huckabee Sanders approved SB 549, a law that lowered the highest individual income tax rate in the state from 4.9% to 4.7% and the highest corporate income tax rate from 5.3% to 5.1%. This change was applied retroactively from January 1, 2023. 
  • State Unemployment Tax: In Arkansas, if you’re a new employer, you’ll pay a 3.1% tax on the first $7,000 of each employee’s earnings for the first three years of your business. If you’ve been around longer, your rate will depend on how many people you employ and how often they leave voluntarily. Essentially, if more former employees use benefits, your unemployment tax rate will go up. For existing businesses, rates range from 0.1% to 5%.
  • Worker’s Compensation: In Arkansas, if you employ more than three workers, you must provide workers’ compensation, except for certain occupations like farmers, real estate agents, and domestic workers. The insurance cost typically amounts to about 70 cents for every $100 of payroll. For instance, a company handling $500,000 in payroll should anticipate an insurance cost of approximately $3,500.

Federal Taxes

  • Federal Unemployment Tax: The federal unemployment tax, managed by the Federal Unemployment Tax Act (FUTA), works alongside state unemployment systems to provide financial support to people who are unemployed due to job loss. In 2023, the FUTA tax rate is 6% on the first $7,000 of each employee’s annual wages.
  • Federal Insurance Contribution Act Tax: In Arkansas, both employers and employees must pay FICA taxes. For Social Security taxes, both businesses and workers contribute 6.2% of their earnings up to $132,900. Additionally, the Medicare tax rate is 1.45% of annual income for both businesses and employees. These rates may change yearly per IRS guidelines, so it’s crucial to stay informed about them.

Key Pay Elements That Impact Payroll in Arkansas

Minimum Wage

In November 2018, Arkansas voters approved a law setting the state’s minimum wage at $11 per hour for January 1, 2021 onwards. This minimum wage applies to businesses with four or more workers. However, businesses with fewer than four employees are allowed to pay at least the federal minimum wage of $7.25 per hour.

There are other circumstances where employers with four or more workers can pay lower than the state minimum wage. For instance, full-time students can earn $9.35 per hour if they work less than 20 hours. Tipped workers, on the other hand, can receive $2.63 per hour as long as their total earnings, including tips, reach $11.00 per hour.

Overtime

Arkansas overtime laws are in line with the Fair Labor Standards Act. Under this law, employees have the right to receive extra pay for working overtime. This extra pay should be at least one and a half times their usual hourly wage. Typically, overtime pay is required when employees work more than 40 hours in a week.

However, there are exceptions to these overtime rules in Arkansas. Some groups of employees don’t automatically get overtime pay as per federal regulations. Instead, they need to discuss this with their employer. These exceptions include:

  • Executives
  • Administrative Staff
  • Professionals with specialized knowledge or artistic skills
  • Information technology employees
  • Outside sales representatives
  • High-earning employees

Learn more in detail about Arkansas Overtime Law.

Pay Stub Laws

Arkansas doesn’t have specific laws that mandate the distribution of pay stubs to employees. But while it’s not required, it’s still a recommended business practice to give employees a clear breakdown of their earnings and deductions. Paystubs can serve as a crucial tool in ensuring transparency, accountability, and fair labor practices within any organization.

Workers’ Compensation Insurance

The Arkansas Workers’ Compensation Commission requires businesses with three or more employees to provide workers’ compensation insurance. This includes both full-time and part-time workers, as well as subcontractors.

Employers also have other specific responsibilities regarding workers’ compensation, such as:

  • Displaying a poster in the workplace with instructions for employees
  • Informing employees of the doctors chosen by the employer and insurance company to treat work-related injuries.
  • Sending reports of employee injuries and medical bills to their insurance representative.

Now, not all workers are not covered by Arkansas workers’ compensation laws. Some exemptions to this provision include:

  • Agricultural farm laborers
  • Domestic helpers
  • Railroad and maritime workers
  • Employees of religious, nonprofit, or charitable organizations
  • Personnel protected by federal law

Arkansas Pay Frequency Laws

In Arkansas, you must pay your employees at least twice a month, allowing for payment schedules such as twice a month, every two weeks, or weekly. If your company earns over $500,000 annually, you can pay exempt management and executive employees on a monthly basis.

Garnishments and Deductions

A “wage garnishment” or “wage attachment” is when an employer is ordered to take a certain amount of money from an employee’s pay and send it directly to their creditor. Usually, a creditor needs a court’s approval before they can do this. However, some creditors, like those that collect taxes, federal student loans, child support, or alimony, don’t need to go to court to get a wage garnishment. They have the right to take money directly from employee paychecks.

However, there are limits to how much money a creditor can take from an employee’s paycheck. In Arkansas, most people can have no more than 25% of their wages taken if a creditor garnishes them. However, there are extra protections for laborers and mechanics in Arkansas.

Final Paycheck

In Arkansas, how an employee receives their final pay depends on whether they quit their job (voluntary termination) or were let go by the company (involuntary termination).

  • For voluntary termination: Payment should be included in the upcoming regular pay cycle.
  • For involuntary termination: Payment should be made on the next scheduled payday.

If payment isn’t made within seven days after the next payday, you’ll owe the employee twice the amount owed.

Step-by-Step Guide to Payroll in Arkansas

Running payroll in Arkansas involves several steps to ensure you’re compliant with state and federal laws while accurately compensating your employees. Below are step-by-step instructions for running payroll in Arkansas that you can follow to get started.

  1. Identify Payroll Rules Applicable to Your Company: Before you even start processing payroll, it’s essential to understand the specific rules and regulations that apply to your business. Consider factors like your company’s size, industry, and any key pay elements that can impact your payroll obligations.
  2. Set Up Your Business as an Employer: Before running payroll in Arkansas, ensure your business is properly registered as an employer. To do that, you’ll need to obtain an Employer Identification Number (EIN) from the IRS, which serves as a unique identifier for tax purposes. You can get your EIN online from the IRS website or by using Form SS-4.
  3. Register with the State of Arkansas: After registering with the IRS, you must register your business with the State of Arkansas too. This involves registering with the Department of Finance and Administration (DFA). You can do this online using the Arkansas Taxpayer Access Point or by sending Form AR-1R by mail. If you have questions or need help, the DFA provides FAQs to guide employers in the state.
  4. Set Up Your Payroll Process: Develop a streamlined payroll process that includes key elements such as pay frequency, payment methods (e.g., paper checks or direct deposit), and a clear pay schedule. Try using payroll software or a payroll service provider to help manage these processes efficiently.
  5. Collect Employee Payroll Paperwork: Have your employees complete necessary payroll forms such as Form W-4 (Employee’s Withholding Certificate) for federal tax withholding and Arkansas State tax forms (such as AR4EC) for state tax withholding. These forms provide essential information for calculating payroll taxes accurately. The best time to gather these payroll documents is during new employee orientation. So, make sure to incorporate this step into your onboarding process.
  6. Keep Tabs on Time and Attendance: It’s essential to keep a close eye on when employees clock in and out to make sure your payroll is spot on. Use a system to track their time and attendance. This can be done through time clocks, manual sheets, or specialized time and attendance tracking software. Make sure the software you choose can also keep track of any overtime hours to make sure you’re following overtime labor rules.
  7. Calculate Payroll and Pay Employees: Now comes the number crunching. Using your chosen payroll system or timesheet app, calculate employee wages, taking into account factors such as hours worked, overtime, and any deductions. Ensure that you pay your employees on time according to your chosen pay schedule (e.g., weekly, bi-weekly, or monthly).
  8. File Payroll Taxes with the Federal Government: As an employer, you’re responsible for paying your share of federal payroll taxes and withholding the correct amounts from your employees’ paychecks. You’ll need to file payroll tax reports and deposit the funds with the IRS. Many businesses do this electronically through the IRS payment website.
  9. File Payroll Taxes with the State of Arkansas: Don’t forget your state payroll taxes. Just like with federal taxes, you’ll need to file state payroll tax reports and submit the required payments to the Arkansas Department of Finance and Administration. To handle Arkansas withholding taxes, use Form AR941M every month unless you receive notice of a classification change from the Arkansas Commissioner of Revenue. These payments are due by the 15th of each month.
  10. Document and Store Your Payroll Records: Just like any other business documents, it’s essential to keep records for a certain period. In Arkansas, the law requires you to maintain payroll records for at least four years. These records include check stubs, canceled checks, cash receipts, and accounting records like payroll journals. Additionally, make sure to retain copies of federal and state tax reports, payroll filings such as W-2s and W-3s, and detailed information for each pay period and worker.
  11. Do Year-End Payroll Tax Reports: At the end of the year, you’ll need to provide your employees with their W-2 forms, summarizing their annual earnings and taxes withheld. For contractors, you’ll need to provide 1099 forms. These documents should be submitted by January 31 of the following year.

Final Thoughts

Running payroll in Arkansas, although not without its complexities, can be a manageable task when approached systematically. By understanding the specific rules that apply to your business, setting up your payroll process efficiently, and staying compliant with both federal and state requirements, you’ll ensure that your employees are paid accurately and on time.

If you want to streamline your processes even further, check out our list of the top 6 payroll apps for US businesses. Alternatively, if you already have a system in place, we offer 10 valuable tips to optimize your payroll procedures in the US.

By using best practices and making use of available tools, you can confidently handle payroll management in Arkansas.

Important Cautionary Note

When making this guide, we have tried to make it accurate, but we do not give any guarantee that the information provided is correct or up-to-date. We therefore strongly advise you to seek advice from qualified professionals before acting on any information provided in this guide. We do not accept any liability for any damages or risks incurred for the use of this guide.