Operational Gaze:
How to Run Payroll in South Dakota?

December 21st 2023

Are you navigating the complexities of running payroll in South Dakota? Whether you’re a seasoned business owner or a newcomer to the world of employment, understanding Mount Rushmore State’s specific requirements is crucial. This guide delves into the intricacies of South Dakota’s payroll process, discussing key aspects such as state tax obligations, compliance with wage and hour laws, and essential reporting procedures. So, without further ado, read on. 

This Article Covers

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

Laws That Affect Payroll Procedures in South Dakota

South Dakota Laws

  • South Dakota Minimum Wage Law: This law establishes the state’s minimum hourly wage, mandating employers to pay workers at least this rate. The minimum wage is subject to periodic adjustments based on inflation. It’s crucial for payroll calculations, ensuring employees receive fair wages. Tipped employees have a distinct lower minimum wage, but it must meet the standard minimum when combined with tips.
  • South Dakota Overtime Law: Employers must pay eligible employees one and a half times their regular rate for hours worked beyond 40 in a week. This law is critical for payroll calculations, especially for businesses with employees working long hours. It ensures workers are fairly compensated for extended work periods, enhancing employee welfare and adherence to labor standards.
  • South Dakota Child Labor Law: Governing the employment of minors, this law sets forth the permissible work types and hours for underage workers. It’s essential for businesses employing young individuals to comply with these regulations, ensuring the protection and well-being of minors in the workforce. This law impacts payroll practices, particularly in managing work schedules and payments for minors.
  • South Dakota Workers’ Compensation Law: This mandates employers to provide workers’ compensation insurance, covering employees in case of work-related injuries or illnesses. Compliance with this law is crucial for businesses, as it affects payroll expenses and employee safety. It ensures financial support for employees during recovery from work-related health issues, promoting a safer work environment.
  • South Dakota Unemployment Insurance Law: Requires employers to contribute to the state’s unemployment insurance fund. This law impacts payroll by adding a mandatory expense, which is crucial for providing financial assistance to unemployed workers. Regular contributions are necessary for compliance and support the state’s effort to aid individuals temporarily out of work.

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 South Dakota 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 South Dakota 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

  • South Dakota Payment of Wages Law: Dictates the frequency and methods of wage payments. Employers must establish regular paydays and adhere to them, including providing final paychecks upon termination. This law is vital for payroll processing, ensuring timely and consistent payment to employees. It safeguards workers’ rights to receive earned wages in a predictable and lawful manner.
  • South Dakota Anti-Discrimination Law: Prohibits employment discrimination based on race, color, creed, religion, sex, ancestry, disability, or national origin. This law impacts HR policies, ensuring a fair and inclusive work environment. Compliance is crucial for creating a non-discriminatory workplace and avoiding legal repercussions, fostering equal opportunity for all employees.
  • South Dakota Leave Laws: Encompass various leave types, including Family Medical Leave, Military Leave, Jury Duty Leave, and Voting Leave. Each type has specific provisions and requirements that employers must follow. These laws influence HR policies and payroll management, ensuring employees receive entitled leave benefits while maintaining compliance with state regulations.
  • South Dakota Workplace Safety Law: Aligns with federal OSHA standards, mandating safe working conditions. Compliance affects HR policies and potentially payroll, as it may involve safety-related accommodations or training. Ensuring a safe workplace is essential for employee well-being and reducing the risk of work-related accidents and illnesses.
  • South Dakota Employee Recordkeeping Law: Requires employers to maintain certain employee records for specified durations. This law impacts HR practices, necessitating accurate and systematic documentation. Compliance is vital for legal purposes and efficient management of employee information, including payroll data, employment history, and personal details.

Worker Classifications in South Dakota

Understanding worker classifications in South Dakota is crucial for employers and employees, as it affects tax obligations, employment benefits, and legal rights.

Employees and Independent Contractors

  • Employees: Typically, employees work under the control and direction of their employer. They are often provided with the necessary tools and equipment for their job and work set hours as defined by the employer. In South Dakota, employees are entitled to certain benefits such as workers’ compensation, unemployment insurance, and adherence to minimum wage and overtime laws. For employers, classifying workers as employees means withholding income taxes, paying Social Security and Medicare taxes, and contributing to unemployment insurance on their wages.
  • Independent Contractors: Independent contractors run their own business and offer services to the public, including businesses. In South Dakota, these individuals are not entitled to the same benefits as employees and have more freedom to set their own hours and terms of work. Tax-wise, independent contractors are responsible for paying their own federal and state taxes, including self-employment tax. For employers, hiring independent contractors means less regulatory burden in terms of benefits and taxes, but it’s crucial to classify them correctly to avoid legal issues.

Common Law

Under Common Law rules, a worker’s status as an employee or independent contractor in South Dakota is determined based on the degree of control and independence in three categories:

  • Behavioral Control: If the employer has the right to control how and what work is done, this suggests an employee relationship.
  • Financial Control: Independent contractors often have a significant investment in their work, have unreimbursed expenses, and have the opportunity for profit or loss.
  • Type of Relationship: Written contracts, employee benefits (like insurance, pension plans, vacation pay), and the permanency of the relationship are considered.

Misclassification of employees as independent contractors can lead to legal repercussions, including penalties and back taxes. Both employers and employees in South Dakota should understand these classifications to ensure compliance with state laws and to protect their respective rights and obligations.

To learn more about the rights of salaried and hourly employees, you can read our guides on your rights as a salaried employee in South Dakota and your rights as an hourly employee in South Dakota.

Payroll Forms and Relevant Bodies in South Dakota

South Dakota Payroll Forms

  • South Dakota New Hire Reporting Form: Employers must use this form to report newly hired or rehired employees to the state. The information helps in locating parents who owe child support. It’s crucial for compliance with state laws and aids in the enforcement of child support orders. Employers need to submit this form within 20 days of hiring a new employee.
  • South Dakota Wage and Tax Statement (Form W-2): Employers issue this form annually to report wages paid and taxes withheld for each employee. It’s essential for state income tax filing purposes. Employers must provide this form to their employees by January 31st each year, ensuring accurate and timely tax reporting.
  • South Dakota Unemployment Insurance Quarterly Report: Employers must submit this report quarterly to the South Dakota Department of Labor and Regulation. It details wages paid and unemployment insurance contributions. Timely filing of this report is necessary for unemployment insurance compliance and helps determine the unemployment benefits eligibility for former employees.
  • South Dakota Workers’ Compensation First Report of Injury Form: Employers use this form to report work-related injuries or illnesses. It’s vital for workers’ compensation claims and ensures that employees receive appropriate benefits for work-related health issues. Prompt and accurate reporting is necessary to fulfill legal obligations and support employee welfare.

Federal Payroll Forms

Alongside South Dakota-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 South Dakota Payroll/Tax Bodies

  • South Dakota Department of Labor and Regulation: This department oversees various aspects of employment in South Dakota, including wage and hour laws, workplace safety, and unemployment insurance. Employers must comply with its regulations to ensure fair labor practices and safe working conditions. The department provides guidance and resources for both employers and employees regarding labor standards and rights.
  • South Dakota Department of Revenue: Responsible for administering tax laws in South Dakota. It deals with state sales tax, use tax, and property taxes, but not state income tax, as South Dakota does not have a personal income tax. Employers interact with this department for tax collection and compliance, ensuring proper remittance of sales and use taxes related to their business operations.
  • South Dakota Division of Insurance: This body regulates the insurance industry in South Dakota, including workers’ compensation insurance. Employers must work with this division to obtain and maintain workers’ compensation coverage, ensuring compliance with state laws and protection for employees in case of work-related injuries or illnesses.
  • South Dakota Unemployment Insurance Division: Part of the Department of Labor and Regulation, this division manages the state’s unemployment insurance program. Employers are required to register with this division and contribute to the unemployment insurance fund. The division processes claims and provides benefits to eligible unemployed individuals, with employers’ contributions being vital to funding this program.
  • 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 South Dakota

State Taxes

  • South Dakota Sales Tax: This is a tax on the sale, lease, or rental of goods and services in the state. Businesses selling goods or services must collect and remit this tax to the South Dakota Department of Revenue. The rate varies by location due to municipal taxes. It’s essential for businesses to comply with sales tax laws to avoid penalties and ensure proper funding for state and local services.
  • South Dakota Use Tax: Imposed on goods purchased out of state but used, stored, or consumed within South Dakota. This tax complements the sales tax, ensuring that purchases from outside the state are taxed equivalently to those made within. Businesses and consumers are responsible for reporting and paying use tax, promoting fair taxation across all purchasing channels.
  • South Dakota Property Tax: Levied on real and personal property. It’s a significant source of revenue for local governments, funding public services like schools and infrastructure. Property taxes are based on the property’s value and vary by locality. Property owners, including businesses, must pay this tax, contributing to community development and public services.
  • South Dakota Motor Vehicle Excise Tax: Applied to the purchase of vehicles. This tax is paid when a vehicle is titled. It’s an important revenue source for the state’s road and transportation infrastructure. Vehicle owners, including businesses with vehicle fleets, must comply with this tax, supporting the maintenance and development of the state’s transportation systems.
  • South Dakota Bank Franchise Tax: Specific to banking institutions operating in the state. This tax is based on the bank’s net income and is part of the state’s regulatory framework for financial institutions. Banks are required to file and pay this tax, contributing to the state’s general fund and ensuring the stability of the financial sector in South Dakota.

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 South Dakota

Minimum Wage

South Dakota’s minimum wage law mandates a specific hourly rate for employees, updated regularly for inflation. Employers must adhere to this rate, impacting payroll budgets. This law ensures employees receive fair compensation for their work, and failure to comply can lead to legal consequences. Understanding and implementing the current minimum wage is crucial for employers to maintain compliance and ethical employment practices.

Overtime

Employees in South Dakota are entitled to overtime pay at 1.5 times their regular rate for hours worked beyond 40 per week. This requirement significantly impacts payroll calculations, particularly for businesses with fluctuating work hours. Properly accounting for overtime is essential for compliance with state labor laws, and it also reflects fair treatment of employees who work extended hours.

Pay Stub Laws

South Dakota requires employers to provide employees with a pay stub each pay period. These pay stubs must detail the wages earned and deductions made. This law ensures transparency in wage calculations and deductions, aiding employees in understanding their compensation. Employers must maintain accurate records and provide clear, detailed pay stubs to comply with these regulations.

Workers’ Compensation Insurance

South Dakota law mandates employers to carry workers’ compensation insurance. This insurance provides benefits to employees who suffer work-related injuries or illnesses. Premiums for this insurance are an essential part of payroll planning and affect overall employment costs. Compliance not only protects employees but also safeguards employers from costly lawsuits and ensures stability in the workforce.

Garnishments and Deductions

Employers in South Dakota may be required to withhold wages for garnishments, such as child support, taxes, or creditor debts. This process involves careful calculation and compliance with legal orders. Payroll systems must be adept at managing these deductions accurately, ensuring that the correct amounts are withheld and remitted to the appropriate entities.

Final Paycheck

In South Dakota, employers are required to provide a final paycheck to employees upon termination of employment. This paycheck must include all wages owed up to the termination date. Handling final paychecks correctly is crucial to avoid legal issues. Employers must be prompt and accurate in calculating and disbursing final wages, including any accrued benefits owed to the employee.

Step-by-Step Guide to Payroll in South Dakota

Here’s a step-by-step guide to efficiently managing payroll in South Dakota, ensuring you stay compliant and informed at every stage.

  • Step 1: Employer Registration: Employers must register their business with the South Dakota Department of Labor and Regulation for unemployment insurance and the Department of Revenue for state taxes. This foundational step is crucial for legal compliance and sets up the business to properly withhold and remit necessary taxes and insurance contributions, which are integral parts of the payroll process.
  • Step 2: Employee Documentation: Collect necessary documentation from employees, including Form W-4 and I-9. This step is vital for tax purposes and legal employment verification. Accurate collection and maintenance of these documents ensure proper federal and state tax withholdings and confirm the employee’s eligibility to work in the U.S., directly impacting payroll processing.
  • Step 3: Establish Payroll Schedule: Decide on a regular payroll schedule, such as weekly, bi-weekly, or monthly. This step is important for budget planning and legal compliance, as South Dakota law requires at least monthly payments. A consistent payroll schedule helps in managing cash flow and ensures timely payment to employees, maintaining workforce satisfaction and legal compliance.
  • Step 4: Calculate Gross Pay: Determine each employee’s gross pay for the pay period. This involves accounting for hourly rates or salaries and including any overtime pay if applicable. Accurate calculation of gross pay is essential for fair employee compensation and lays the foundation for subsequent payroll deductions. It’s a critical step in ensuring employee satisfaction and adherence to wage laws.
  • Step 5: Deduct Taxes and Withholdings: Withhold the appropriate federal and state taxes, along with other deductions such as benefits or garnishments. This step is crucial for complying with tax laws and maintaining accurate payroll records. Precise calculation and remittance of these deductions are essential to meet legal obligations and ensure proper funding for employee benefits.
  • Step 6: Pay Employees: Issue payments to employees via the chosen method, like direct deposit or checks. This step is the culmination of the payroll process, where employees receive their compensation. Timely and accurate payment is essential for maintaining employee trust and meeting legal requirements. It also reflects the business’s commitment to its workforce.
  • Step 7: File Payroll Reports: Submit necessary payroll reports to state and federal agencies, including unemployment insurance filings and tax reports. This step is vital for compliance with reporting requirements. Timely and accurate submission of these reports ensures the business meets its legal obligations and maintains good standing with regulatory bodies.
  • Step 8: Year-End Reporting: At the end of the year, complete and issue Form W-2 to employees and file it with the IRS. This step is crucial for annual tax reconciliation and provides employees with the information needed for their tax returns. Accurate year-end reporting is essential for compliance with tax laws and assists employees in their personal tax filings.

Final Thoughts

Managing payroll in South Dakota can be a particularly challenging task. Employees must ensure they diligently adhere to South Dakota’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 United States. If you’ve already established a payroll system, we’ve provided ten tips to enhance your payroll procedure within the United States.

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.