Operational Gaze:
How to Run Payroll in New Mexico?

April 11th 2024

Are you an employer in New Mexico grappling with the complexities of running payroll? Navigating the specific regulations and requirements of the Land of Enchantment can be daunting. Ensuring compliance with state tax laws, understanding unique state-specific deductions, and keeping up-to-date with the latest legislative changes are crucial steps. This comprehensive guide aims to simplify these processes, offering clarity and confidence to employers and employees alike in managing payroll efficiently. So, without further ado, read on.

This Article Covers

Laws That Affect Payroll Procedures in New Mexico
Worker Classifications in New Mexico
Payroll Forms and Relevant Bodies in New Mexico
Applicable Taxes in New Mexico
Key Pay Elements That Impact Payroll in New Mexico
Step-by-Step Guide to Payroll in New Mexico

Laws That Affect Payroll Procedures in New Mexico

New Mexico Laws

  • New Mexico Overtime Law: Private employers must offer overtime pay at 1.5 times the regular rate for hours worked over 40 in a seven-day period. Exceptions exist for public agency police officers, firefighters, and certain hospital and nursing home employees. Exemptions include FLSA-exempt employees, salespersons, and those paid by piecework or flat rates​​.
  • New Mexico Minimum Wage: The minimum wage is $12.00 per hour. Tipped employees have a minimum wage of $3.00 per hour. This represents an increase from previous rates and applies to most businesses, ensuring a basic standard of living for workers in various sectors​​.
  • New Mexico Payroll Deductions: Employers must pay full wages unless lawful deductions are authorized by both the employer and employee. This includes federal and State income tax withholdings. In agriculture, employers may deduct the reasonable value of food, utilities, supplies, or housing provided to employees from wages due under certain conditions​​.
  • New Mexico Wage Payment Timing Law: Employers must pay wages on regular paydays, not exceeding 16 days apart. Wages earned from the 1st to 15th of a month must be paid by the 25th; wages from the 16th to month-end by the 10th of the following month. For out-of-state payroll processing, different timelines apply. Employers may opt for more frequent payments​​.
  • New Mexico Final Pay Rule: This rule varies significantly for terminated versus resigning employees. Terminated employees must receive final pay within 5 days if wages are fixed, or within 10 days if variable. Conversely, resigning employees are entitled to receive their final pay on the next scheduled payday. Crucially, any unused accrued PTO must be included in the final paycheck as earned wages, ensuring fair compensation for employees’ accrued benefits​​.
  • New Mexico Meal & Rest Breaks: The New Mexico State law doesn’t mandate meal or rest breaks. However, any breaks shorter than 30 minutes must be paid. This rule ensures that brief breaks during work hours, often essential for employee well-being, are compensated​​.

Federal Laws

As compared to state-mandated laws, federal laws provide a nationwide framework for payroll procedures that must be adhered to by employers in New Mexico and across the United States.

  • Fair Labor Standards Act (FLSA): The FLSA is a federal law that sets standards for minimum wage, overtime pay, recordkeeping, and youth employment. As of the last update, the federal minimum wage is $7.25 per hour, although employers in New Mexico must comply if state minimum wage laws dictate a higher amount. Overtime must be paid at a rate of at least one and one-half times the employee’s regular rate for hours worked beyond 40 in a workweek.
  • Family and Medical Leave Act (FMLA): The FMLA sets out provisions for leave entitlement. Eligible employees have the right to take up to 12 weeks of unpaid leave for events such as childbirth, adoption, or the care of a family member with a serious health condition.
  • Federal Insurance Contributions Act (FICA): The FICA requires that employers deduct Social Security and Medicare taxes from paychecks and also make a matching contribution. As of the current information available, the Social Security tax rate was 6.2% for the employer and 6.2% for the employee on earnings up to the applicable taxable maximum amount. Medicare tax was 1.45% each for both employer and employee, with an additional 0.9% for high earners.
  • Federal Unemployment Tax Act (FUTA): FUTA imposes a federal payroll tax on employers to help fund state unemployment agencies. Employers pay this tax annually, and it is calculated at 6% of the first $7,000 paid to each employee as wages during the fiscal year. Significantly, employers can receive a credit of up to 5.4% for making timely and full payments of state unemployment taxes, effectively reducing the FUTA rate to a more manageable 0.6%.

HR Laws

  • Human Rights Act (House Bill 207): The House Bill 207 expands the Human Rights Act’s scope. It now applies to certain actions of the State, its political subdivisions, and public contractors. The law broadens protected classes to include gender, offering wider discrimination protection related to disability, gender, gender identity, sex, and sexual orientation​​.
  • Discrimination: New Mexico: Amendments to the New Mexico Human Rights Act (House Bill 207) , effective June 16, 2023, add gender as a protected characteristic and modify definitions of gender identity, sex, and sexual orientation. This ensures more inclusive workplaces and influences payroll procedures in aspects like equal pay, promotions, and benefits, ensuring compliance with these broadened anti-discrimination measures​​.
  • New Mexico’s “Ban the Box” Law: This pivotal New Mexico HR law restricts employers from inquiring about a job applicant’s criminal history on initial job applications. Employers, however, retain the ability to consider an applicant’s conviction after thoroughly reviewing the application and during subsequent employment discussions. This law significantly affects HR processes and payroll procedures, particularly in hiring practices, ensuring fair chances for applicants with criminal histories and promoting equitable employment opportunities.
  • Equal Pay and Employee Relations: New Mexico law mandates non-discrimination and retaliation protections in various protected classes, including equal pay protections. These laws ensure fairness, influencing payroll related to pay equity, wage adjustments, and benefits distribution across different employee demographics, promoting equitable workplace practices​​.
  • Pay and Benefits Requirements: Laws cover health care continuation, payment of wages, pay frequency, pay statements, and wage deductions. These regulations ensure that employee compensation and benefits are managed fairly and transparently, impacting payroll procedures in terms of how and when employees are paid, benefit distributions, and deductions from wages​​.
  • Time Off and Leaves of Absence: New Mexico provides for various time off and leaves, including military, voting, domestic violence, emergency responders, and paid sick leave. These leave entitlements to influence payroll procedures, particularly in maintaining accurate pay records and calculating leave benefits, ensuring compliance with these employee rights​​.
  • Health and Safety Regulations: New Mexico’s laws prohibit workplace smoking and texting while driving. While not directly affecting payroll, these regulations impact overall HR policies and employee welfare strategies, contributing to a safe and compliant work environment​​.
  • Organizational Exit Compliance: When employment ends, employers must diligently adhere to final pay and job reference requirements. This includes the timely payment of final wages and providing references, affecting payroll procedures in accurately calculating and delivering final paychecks. Additionally, it involves maintaining comprehensive and appropriate employment records for references, ensuring a smooth and compliant transition process.

Worker Classifications in New Mexico

In New Mexico, the classification of workers as either employees or independent contractors is a critical aspect of employment and payroll procedures. The determination of this status affects various legal obligations, including unemployment insurance, tax withholdings, and labor law protections. Here’s an overview of the employees vs. independent contractors and the ABC test.

Employees and Independent Contractors

Misclassification of workers can have significant legal and financial consequences. In New Mexico, the determination of whether a worker is considered an employee or an independent contractor depends on specific tests applied under both state and federal law. These comprehensive tests are designed to help determine the nature of the relationship between the worker and the employer, ensuring proper classification for legal and financial purposes.

The ABC Test

The “ABC Test” is used to define a non-employee or contractor. It includes three criteria:

  • Control or Direction: The individual must be free from control or direction in the performance of the overall services performed, both contractually and in practice.
  • Course of Business: The service provided must be outside the employer’s usual course of business or performed outside of all the places of business of the enterprise/company.
  • Independently Established Trade: The individual should be engaged in an independently established trade, occupation, profession, or business of the same nature as the service provided.

These criteria must be met collectively to be classified as an independent contractor. To learn more about the rights of salaried and hourly employees, read our guides on your rights as a salaried employee in New Mexico and your rights as an hourly employee in New Mexico.

Payroll Forms and Relevant Bodies in New Mexico

New Mexico Payroll Forms

  • ES-903A & ES-903B: These forms are pivotal for New Mexico employers to fulfill their unemployment insurance tax obligations. They facilitate the reporting of taxable wages and the calculation of unemployment insurance dues. Filing is exclusively online, and these non-submittable forms are due monthly, ensuring timely and accurate contributions to the state’s unemployment fund, which supports workers during periods of joblessness.
  • TRD-41414: This form is integral for reporting state tax withholdings from employee wages. Due monthly, it ensures the accurate and timely remittance of state taxes withheld from employees. This process is vital for state tax compliance, aiding in the smooth operation of the state’s taxation system and ensuring that employees’ tax obligations are correctly managed.
  • WWT-PV: Employers in New Mexico use the WWT-PV form to manually pay state wage withholdings, primarily when electronic payment is not an option. Due monthly, it allows for the traditional payment of employee tax withholdings, ensuring compliance with state tax laws. This form is essential for those preferring or requiring paper-based tax payment methods.
  • WC-1: This form, due monthly, is essential for New Mexico employers for reporting and remitting taxes withheld from employee wages. Accurate and timely filing of WC-1 is crucial for maintaining state tax compliance and ensuring the proper handling of employee withholdings.
  • RPD-41072: Filed annually, this form is used by employers to report state tax withholdings, ensuring compliance with state taxation laws. Timely submission of RPD-41072 helps maintain accurate tax records and aids in the efficient operation of the state’s tax system.
  • W-2 Copy 1: Due annually, this form is used to report wages paid and taxes withheld for each employee to the state. It’s a key part of the state’s income tax collection and compliance framework, ensuring accurate employee wage reporting and facilitating state tax administration.

Federal Payroll Forms

Alongside New Mexico-specific documentation, federal payroll forms are equally important:

  • Form W-4 (Employee’s Withholding Certificate): The Form W-4, or Employee’s Withholding Certificate, is a federal document that employees across the United States fill out to inform employers about how much federal income tax should be withheld from the wages. The Form W-4 takes into account various factors like marital status, dependents, and additional income to tailor the withholding to the employee’s unique tax situation. With periodic updates, especially after major life events or changes in financial circumstances, the W-4 ensures that employees neither overpay nor underpay the federal income taxes throughout the year.
  • Form W-2 (Wage and Tax Statement): Employers use the Form W-2, known as the Wage and Tax Statement, to report the annual wages paid to each of their employees and the specific amount of taxes withheld. This federal form, issued to every employee before the end of January each year, is vital for individuals when preparing their personal income tax returns. For the employee, it offers a clear summary of their earnings and tax withholdings, while for the IRS, it serves as a record of the individual’s employment-related earnings and tax obligations.
  • Form W-3 (Transmittal of Wage and Tax Statements): The Form W-3 is basically a document used by employers to submit the total of all W-2 forms to the Social Security Administration. This form summarizes the total earnings, Social Security wages, Medicare wages, and withholding for all employees for the year. The W-3, which must accompany the W-2 forms, is an essential tool for the SSA to verify an employee’s income and tax information.
  • Form 940 (Federal Unemployment Tax Act Return): Form 940 is a federal form that employers utilize to report annual Federal Unemployment Tax Act (FUTA) tax. This tax provides funds for state unemployment agencies and supports unemployed workers. The form calculates the employer’s federal unemployment tax liability, considering any state unemployment tax they’ve already paid. By accurately completing and submitting this form, employers contribute to a system that offers financial support to individuals during periods of joblessness.
  • Form 941 (Employer’s Quarterly Federal Tax Return): Used by employers, Form 941, titled the Employer’s Quarterly Federal Tax Return, reports the wages they’ve paid and the corresponding taxes withheld every quarter. It captures details related to federal income tax, Social Security, and Medicare withholdings. By submitting this form quarterly, employers maintain a consistent record with the IRS, ensuring they meet tax obligations as required.
  • Form 944 (Employer’s Annual Federal Tax Return): Designed for smaller employers, the Form 944 allows them to report income and FICA taxes withheld from employees’ paychecks just once a year instead of quarterly. This form simplifies the reporting process for eligible small businesses by reducing the number of times they must submit tax withholding information, easing the administrative burden and allowing them to focus on running their business.
  • Form 1099 (Miscellaneous Income): The 1099 forms are a series of documents the IRS uses to account for various types of non-employment income. There are many different types of 1099 forms, but one of the most common is the 1099-MISC, which is given to independent contractors or freelancers to report payments made to them for services rendered in the course of trade or business. This form is critical for the IRS to track income that might otherwise go unreported and for contractors to accurately report their income and calculate the taxes.

Federal and New Mexico Payroll/Tax Bodies

  • New Mexico Taxation and Revenue Department: Responsible for managing state tax affairs, this department plays a crucial role in the collection of wage withholding taxes. Employers must withhold state income tax from employees’ wages and remit them to this department. It also handles Non-Taxable Transaction Certificates, which are essential for businesses to claim deductions on certain tax-exempt transactions. Compliance with this department’s regulations is vital for all businesses operating in New Mexico​​.
  • New Mexico Department of Workforce Solutions: This department of workforce solutions administers the Unemployment Insurance program, funded through employers’ payroll tax contributions. It provides benefits to eligible individuals who are unemployed through no fault of their own. The department also offers resources to help businesses protect themselves from higher unemployment insurance tax rates. Additionally, it enforces wage, minimum wage, and overtime labor laws, ensuring fair labor practices across the state​​​​.
  • New Mexico Workers’ Compensation Administration: This body mandates employers to pay a workers’ compensation assessment fee, crucial for funding the Workers’ Compensation Act. Employers are required to pay $2.30 per employee per quarter, with an additional $2 per employee taken as a payroll deduction. The funds are used to support the Uninsured Employers’ Fund and other workers’ comp programs. Employers must also comply with safety inspection requirements and display relevant information at the workplace. This ensures that both employers and employees contribute to and are protected by the workers’ compensation system​​.
  • Internal Revenue Service (IRS): The IRS stands as the United States’ primary federal tax authority. Its mandate covers the vast spectrum of federal tax matters, inclusive of payroll taxes. By providing regulatory guidelines, tax codes, and essential resources, the IRS facilitates nationwide tax compliance. It is important to note that both employers and employees rely on the IRS’s directives to understand their federal tax obligations and ensure adherence.
  • U.S. Department of Labor (DOL): Believe it or not, theU.S. DOL has a broad role, impacting various facets of employment across the nation. Among its chief responsibilities are the formulation and enforcement of wage and hour standards. The DOL ensures fair labor practices, safeguards employee rights, and fosters a balanced work environment. This guidance assists employers in aligning the operations with federal employment norms and standards.
  • Social Security Administration (SSA): The Social Security Administration (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— crucial for employment, finances, and accessing government services.
  • Wage and Hour Division (WHD): The WHD is a part of the U.S. DOL, whose main job is to ensure employers follow labor standards to protect workers’ rights. The WHD enforces laws like the Fair Labor Standards Act (FLSA), 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 FMLA.

Applicable Taxes in New Mexico

State Taxes

  • Gross Receipts Tax: This tax applies to the sale of goods and services in New Mexico. Businesses must file gross receipts tax returns, and the tax rate varies by location. It’s crucial for employers/businesses to understand the nexus – the connection with the New Mexico state that establishes tax obligations – and accurately report taxes based on the business locations.
  • Wage Withholding Tax: Employers in New Mexico are mandated to withhold state income tax from employees’ wages. This crucial process involves calculating the correct amount to withhold based on comprehensive state guidelines and responsibly remitting these taxes to the state. Meticulous compliance with withholding requirements is essential to avoid penalties and ensure both legal conformity and financial integrity in managing employee compensations.
  • Cannabis Excise Tax: With the legalization of cannabis, New Mexico imposes an excise tax on cannabis sales. This tax is levied on producers and is separate from the gross receipts tax, requiring careful accounting and reporting by businesses involved in the cannabis industry.
  • Compensating Tax: This tax applies to the use of property or services in New Mexico when no gross receipts tax has been paid. Note that this is typically relevant for businesses and individuals who purchase goods or services from outside the state for use within New Mexico.
  • Corporate Income & Franchise Tax: In New Mexico, businesses operating within the state may be subject to both corporate income tax and franchise tax. These taxes are levied based on a company’s income and the privilege of doing business in New Mexico, respectively. It is critically for corporate entities to understand the specific filing requirements and applicable tax rates to ensure compliance. Thorough adherence to these regulations are vital for maintaining good standing and avoiding financial penalties within the state’s business and tax framework.
  • Property Tax: Property tax in New Mexico is administered at the county level and is based on the assessed value of real and personal property. Property owners must be aware of assessment procedures, appeal processes, and tax payment schedules to ensure compliance with the state.
  • Other State-Specific Taxes: In New Mexico, the state government also imposes specific taxes on specialized industries such as oil, gas, and mineral extraction. These sector-specific taxes are crucial for businesses operating in these fields and contribute significantly to the state’s overall revenue. It is imperative for companies involved in these industries to comply with these tax requirements, as they play a pivotal role in the economic landscape of New Mexico.

Federal Taxes

  • Federal Income Tax: Employers are obligated to withhold federal income tax from employees’ paychecks. The amount withheld is determined by the information the employee furnishes on Form W-4 and is calculated according to the IRS-provided tax tables. This tax is progressive, with the applicable rate escalating as the employee’s taxable income increases.
  • Social Security and Medicare Taxes (FICA): Both employers and employees are mandated to contribute to Social Security and Medicare through the Federal Insurance Contributions Act (FICA) tax. Employers are responsible for accurately withholding the specified amount from their employees’ wages and also for contributing a corresponding matching amount.
  • Federal Unemployment Tax Act (FUTA): Employers pay this federal tax separately from other taxes, and it is not withheld from employees’ wages. FUTA, working in conjunction with the state unemployment system, provides critical funds for workers who are unemployed.

Key Pay Elements That Impact Payroll in New Mexico

Minimum Wage

In New Mexico, the minimum wage as of 2024 stands at $12.00 per hour, significantly higher than the federal minimum wage of $7.25. This rate is applicable to most employees, but exceptions are made for tipped workers, who must earn an equivalent to the minimum wage when tips are included. Further, special lower wage provisions are available for younger workers and trainees, ensuring equitable pay practices across a variety of employment situations.

Overtime

In New Mexico, overtime pay is required at 1.5 times the regular rate for hours worked over the standard 40 in a workweek. Exemptions apply to specific job categories like executive, administrative, or professional roles, according to certain criteria. These rules are designed to ensure fair overtime compensation, considering the varied nature and responsibilities of different job roles, thus maintaining a balance between employee rights and job requirements.

Pay Stub Laws

New Mexico law mandates that employers provide detailed pay stubs each pay period, including hours worked, pay rate, gross and net pay, and deductions. Both paper and electronic pay stubs are acceptable, with the essential condition that employees have easy access to view, review, and print them if needed. This requirement ensures wage reporting transparency, effectively helping employees to understand their compensation and deductions clearly and comprehensively.

Workers’ Compensation Insurance

Employers in New Mexico must provide workers’ compensation insurance, covering medical expenses and wage replacement for employees with job-related injuries or illnesses. Some exceptions are based on employment type or business size. This insurance plays a vital role in safeguarding employees against unexpected injuries, ensuring financial and health security.

Garnishments and Deductions

New Mexico employers are required to comply with wage garnishment laws, including deductions for child support, alimony, or debts. This responsibility involves precise calculation and remittance of deducted amounts, ensuring adherence to legal mandates. Employers must manage these payroll deductions accurately and confidentially, maintaining legal compliance and safeguarding employee trust and privacy, while also upholding fair labor practices.

Final Paycheck

In New Mexico, the distribution of an employee’s final paycheck varies depending on whether the employee is terminated or resigns. State labor laws dictate the timing and accuracy of the final paycheck, ensuring employees are paid what they are owed at employment’s end. This regulation is key to upholding fair labor practices and protecting employee rights in the state.

Step-by-Step Guide to Payroll in New Mexico

  • Step 1: Establish Employer Registration: Employers in New Mexico must first register with both the federal and state governments. This involves obtaining an Employer Identification Number (EIN) from the IRS and registering with the New Mexico Taxation and Revenue Department for state taxes. These are essential for legal operation and enable employers to handle payroll taxes and report employee earnings in compliance with state and federal laws.
  • Step 2: Set Up Payroll Details: Once registered successfully, it’s time to decide on a payroll schedule (e.g., weekly, bi-weekly, monthly) and stick to it consistently. Determine employee classifications (exempt vs. non-exempt) to ensure proper overtime pay. Choose a payroll system or software that suits your business needs, taking into account New Mexico’s specific payroll requirements, such as minimum wage rates, overtime rules, and pay stub details.
  • Step 3: Employee Documentation and Data Collection: Collect necessary employee information, including W-4 (Employee’s Withholding Allowance Certificate) and other state withholding forms, direct deposit details, and personal identification information. Accurate data collection is crucial for tax withholding and payroll processing. Ensure all employee information is kept confidential and securely stored, complying with privacy laws and regulations.
  • Step 4: Calculate Gross Pay and Deductions: For each pay period, calculate employees’ gross pay based on hourly rate or salary. Include any applicable overtime, bonuses, or commissions. Then, subtract federal and state taxes, Social Security, Medicare, and any other deductions, such as insurance premiums or retirement contributions, to arrive at the net pay.
  • Step 5: Process Payroll and Distribute Paychecks: After calculating net pay, process payroll using your chosen system. Distribute paychecks to employees either through direct deposit, which is commonly preferred or by issuing physical checks. Ensure that employees receive their pay on the predetermined payday, adhering to New Mexico’s timely payment laws.
  • Step 6: Report and Deposit Payroll Taxes: Regularly report and deposit both federal and state payroll taxes. This includes withholding taxes and employer contributions to Social Security and Medicare. Adhere to the IRS and New Mexico’s Taxation and Revenue Department’s deadlines for tax filings and deposits to avoid penalties and ensure compliance.
  • Step 7: Maintain Records and Prepare for Year-End Reporting: Keep detailed records of all payroll activities, including gross wages, deductions, tax payments, and employee information. These meticulously maintained records are vital for accurate year-end tax reporting and may be essential in case of audits. Prepare for year-end reporting by issuing W-2 forms to employees and timely submitting necessary documents to both the IRS and state authorities.

Final Thoughts

Managing payroll in New Mexico can be a particularly challenging task. Employees must ensure they diligently adhere to New Mexico’s strict payroll regulations. To simplify the often complex process of managing payroll, consider exploring our comprehensive list of the top 6 applications tailored to streamline payroll responsibilities in the USA. If you’ve already established a payroll system, we’ve provided ten tips to enhance your payroll procedure within the USA.

Important Cautionary Note

This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.

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