Operational Gaze:
How to Run Payroll in Vermont?

December 19th 2023

As an employer in Vermont, ensuring proper payroll management involves following specific legal steps when compensating your employees. This includes calculating their earnings, deductions, and adhering to payroll tax regulations. To handle payroll effectively, it’s crucial for employers to understand these regulations and stay informed about Vermont’s labor and tax laws.

This article offers a straightforward, step-by-step guide tailored to meet Vermont’s payroll requirements. The guide simplifies the payroll process by providing practical advice and clear instructions for Vermont businesses, ensuring that payroll activities align with the law.

This Article Covers

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

Laws That Affect Payroll Procedures in Vermont

In the space of payroll procedures, certain legal regulations govern how employees are compensated and businesses must adhere to these rules. 

Vermont Laws

Vermont has established a comprehensive set of employment laws and regulations that encompass various facets of the workforce, addressing aspects such as labor standards, minimum wage, and family leave. Below is a succinct overview of key regulations applicable in Vermont:

  • Vermont Labor Code: The labor regulations outlined in Vermont’s administrative code cover critical areas, including the manner in which wages are disbursed, provisions for sick leave, and the framework for workers’ compensation. It is noteworthy that Vermont’s laws encompass federal statutes, such as the Federal Labor Standards Act (FLSA), to govern specific rules.
  • Minimum Wage: Vermont is incrementally increasing its minimum wage, it currently stands at $13.67 per hour.
  • Overtime Pay: Vermont adheres to federal standards regarding overtime pay. Non-exempt employees are entitled to receive 1.5 times their regular wage for hours worked beyond 40 in a week.
  • Paid Family and Medical Leave (PFML): Vermont has instituted a program for paid family and medical leave. Eligible employees receive compensation for specific family and medical situations, with mandatory employer contributions to this program.
  • Equal Pay Act: Vermont enforces an Equal Pay Act, designed to prevent wage discrimination based on gender. Employers must ensure that all employees, irrespective of gender, receive equitable compensation for comparable work.
  • Meal and Rest Breaks: Employers in Vermont must make sure their employees get breaks. Even though the law doesn’t say exactly how long these breaks should be, workers have the right to reasonable time for meals.
  • Parental Leave: The Parental Leave Act in Vermont enables eligible employees to take unpaid job-protected leave for reasons such as childbirth or adoption.
  • Sick Leave: In Vermont, laws govern sick leave, compelling employers to grant paid or unpaid sick leave to eligible employees. These regulations also delineate the accrual and utilization of sick leave.
  • Non-Compete Agreements: Vermont has specific regulations concerning non-compete agreements, restricting employees from working for competing employers. For these agreements to be legally binding, they must meet specified legal criteria.
  • Wage Theft Prevention: Vermont has implemented regulations to prevent wage theft, encompassing rules governing the payment of wages, permissible deductions, and the timing of wage disbursements.

Federal Laws

There are three crucial federal laws significantly impact how you handle payroll, each playing a crucial role in the employment landscape:

  • The Fair Labor Standards Act (FLSA): This law establishes detailed guidelines covering minimum wage, overtime pay, recordkeeping, exemptions, and rules regarding child labor. It applies to various sectors, including private businesses and government entities at different levels. The FLSA is fundamental in regulating labor practices.
  • The Federal Insurance Contributions Act (FICA): FICA assigns both employers and employees the responsibility of contributing to Social Security and Medicare. Employers must withhold 6.2% for Social Security and 1.45% for Medicare from each employee’s earnings. At the same time, employers match these deductions, resulting in a combined FICA payroll tax rate of 15.3% for each employee.
  • The Federal Unemployment Tax Act (FUTA): FUTA requires employers to contribute to unemployment taxes, providing benefits to eligible employees who lose their jobs. While not directly deducted from employee wages, FUTA contributions need careful consideration in every payroll cycle. Generally, a 6% tax on the initial $7,000 annually disbursed to an employee is expected, with specific industry exceptions. Effectively navigating these federal laws is crucial for ensuring compliant and efficient payroll management.

HR Laws

  • Posting Requirements: In the state of Vermont, it is imperative for every employer to observe specific posting requirements as mandated by the law. Employers are obligated to prominently display labor law posters within the workplace premises. These informative posters cover crucial topics such as minimum wage regulations, health and safety guidelines, and other fundamental labor laws applicable in Vermont. By fulfilling this requirement, employers ensure that their workforce is adequately informed about their rights and responsibilities in accordance with Vermont labor laws.
  • New Hire Reporting: Employers operating in Vermont carry a legal responsibility to promptly report any new hires, recalls, or rehires to the relevant department within a period of 10 days. This mandatory notification should encompass comprehensive details about the newly hired, recalled, or rehired individual. Required information includes the individual’s full name, address, social security number, and the commencement date of employment. Adhering to this legal obligation ensures compliance with Vermont’s regulations and facilitates efficient record-keeping for the relevant authorities.

Worker Classifications in Vermont

Employees and Independent Contractors

In Vermont, it’s crucial to figure out if a worker is an employee or an independent contractor. The classification of workers depends on factors such as how much control there is, the freedom the person has in their work, and the type of job they work. Getting this right matters because misclassifying workers can lead to legal and financial issues. Employers in Vermont need to follow both state and federal laws, including reporting rules, to make sure they classify workers correctly and follow employment rules.

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

The ABC Test

The “ABC Test” is a tool used to define the relationship between an employer and an individual. All three elements must be met for the individual to be considered a non-employee. It’s essential to note that the “B” part of the test has two key aspects.

The ABC Test includes:

  1. The individual must have and maintain independence from control or direction in performing services, both as specified in their service contract and in practice. Examples of this independence include an individual bidding for a job and being paid based on completed tasks or completing a job without specific guidance, supervision, or set working hours.
  2. The services provided must either be outside the usual business operations or take place in locations not associated with the employer’s business establishments. Examples include an individual performing tasks different from regular employees or working exclusively at their own facility.
  3. The individual should consistently engage in an independently established trade, occupation, profession, or business. Examples include having their own employees, holding a liable unemployment insurance (UI) account, or actively advertising their business services to the general public.

Payroll Forms and Relevant Bodies in Vermont

Managing payroll in Vermont includes the process of complying to a range of state and federal regulations, which includes completing essential payroll documentation. In this segment, we’ll explore the crucial forms and regulatory bodies in Vermont that employers need to be aware of to ensure compliance and effectively handle payroll duties. 

Vermont Payroll Forms

Federal Payroll Forms

  • W-3 Form: The W-3 Form functions as a comprehensive compilation, offering a summary of the complete compensation and taxes paid by all employees.
  • Form 940: This form is utilized to report unemployment taxes owed to the IRS, ensuring accurate and punctual submissions.
  • Form 941: Employers use Form 941 to furnish a detailed quarterly breakdown of earnings and deductions, covering income and FICA taxes withheld from employee paychecks.
  • W-4 Form: The W-4 Form is crucial for employers in accurately determining the appropriate tax withholding for their employees, facilitating precise payroll management.
  • W-2 Form: Specifically designed for this purpose, the W-2 Form vividly displays each employee’s annual earnings, promoting transparency in financial reporting.
  • Form 944: Serving a crucial role, Form 944 facilitates the annual reporting of both income and FICA taxes withheld from employee paychecks.
  • 1099 Forms: These forms play a pivotal role in providing contractors with essential information, enabling them to calculate their IRS tax obligations based on their earnings, ensuring adherence to tax regulations.

Federal and Vermont Payroll/ Tax Bodies

  • Internal Revenue Service (IRS): The IRS is the main federal agency that collects taxes. Employers work with the IRS to do things like take out income taxes and contribute to Social Security and Medicare.
  • Social Security Administration (SSA): The SSA looks after the Social Security program. Employers and employees pay into Social Security through payroll taxes, and employers tell the SSA about these payments as part of their payroll duties.
  • Department of Labor (DOL): The DOL sets and enforces labor rules, like minimum wage and overtime. Employers need to follow DOL guidelines for fair work practices.
  • Vermont Department of Taxes: This Vermont Department of Taxes manages state taxes. Employers work with them to handle state tax duties, such as taking out income tax and reporting.
  • Vermont Department of Labor: The Vermont Department of Labor makes sure that employers follow state work laws. This includes things like the minimum wage, and employers need to meet these rules set by the department.
  • Vermont Department of Financial Regulation: The Vermont Department of Financial Regulation might be involved in overseeing certain financial aspects related to payroll, like insurance. Depending on the business, employers might need to work with them for specific industry and insurance needs.

Applicable Taxes in Vermont

Employer Contributions

Federal Unemployment Tax Act (FUTA): Vermont State conforms to the regulations stipulated by the Federal Unemployment Tax Act (FUTA). This act presently establishes a fixed federal rate of 6.0% applicable to the initial $7,000 of earnings for every employee.

Withheld from Employee’s Wages

  • Vermont Income Taxes: People living in Vermont have to pay state income tax, which is determined by how much they earn. The tax rates range from 3.35% to 8.75%, depending on their income. The calculation is based on a modified federal adjusted gross income. Some Vermont towns may also have local income taxes for both residents and non-residents working there, and these rates can vary. For exact details on income tax rates and any local taxes, it’s best to check with the Vermont Department of Taxes or local tax authorities.
  • Workers’ Compensation in Vermont: Employers in Vermont must provide workers’ compensation insurance for their employees. This program, overseen by the Vermont Department of Labor, gives benefits like medical care and wage replacement to employees hurt while working. The cost of this insurance can change based on things like the type of work, the number of employees, and the employer’s claims history. To get the latest rates, it’s recommended to check with insurance providers or the Workers’ Compensation Division.
  • Social Security (FICA) Withholding: Social Security withholding, managed by the Federal Insurance Contributions Act (FICA) tax, means taking out 6.2% from an employee’s pay for Social Security, but only up to a certain yearly limit. There’s an extra deduction of 1.45% for Medicare, which applies to all earnings. The income limit for Social Security withholding might change every year, so it’s good for employees to verify the current limits with the Social Security Administration.

Additional Relevant Subtractions to Withhold on Behalf of Employees

In Vermont, it’s important to know that certain deductions from an employee’s pay are allowed under the Fair Labor Standards Act (FLSA). Here are the situations where deductions are permissible:

  • Personal Absences: If an employee is absent from work for one or more full days due to personal reasons other than sickness or disability.
  • Sickness or Disability Absences: When an employee is absent for one or more full days due to sickness or disability, and the deduction follows a genuine plan compensating for lost salary during illness.
  • Compensation Offsetting: To offset amounts employees get from jury or witness fees or temporary military duty pay.
  • Safety Rule Infractions: If penalties are imposed in good faith for breaking safety rules of major importance.
  • Disciplinary Suspensions: For unpaid disciplinary suspensions of one or more full days, imposed in good faith for breaking workplace conduct rules.
  • Initial or Terminal Week of Employment: In the first or last week of employment if the employee doesn’t work the full week.
  • Family and Medical Leave: For unpaid leave taken by the employee under the Federal Family and Medical Leave Act (FMLA).

Key Pay Elements That Impact Payroll in Vermont

Minimum Wage

Currently, Vermont mandates a minimum wage of $13.67 per hour.

Overtime

Vermont overtime laws mirror the guidelines set forth in the federal Fair Labor Standards Act (FLSA). The fundamental principle is that employees who exceed 40 hours in a workweek are entitled to overtime pay at a rate of 1.5 times their regular hourly wage. With Vermont’s minimum wage fixed at $13.67 per hour, this results in an overtime rate of $20.51 per hour.

Workers’ Compensation Insurance

In Vermont, employers are required to comply with regulations concerning Workers’ Compensation Insurance, which serves as a protective measure for employees confronting work-related injuries or illnesses. These programs not only provide a safety net but also extend disability benefits to workers incapacitated due to job-related factors. This financial support helps alleviate the economic impact when employees require time off from work.

Pay Stub Laws

Employees in Vermont have the right to receive prompt compensation for all hours worked. They are entitled to pay statements and access to their employer’s records, which detail work hours and earnings.

Paycheck Deduction

Vermont law mandates that employers refrain from deducting funds from an employee’s earnings for regular operational costs, such as supplies, materials, or tools. If an employer requires an employee to obtain or lease a uniform, they must either absorb the uniform expense or reimburse the employee for any costs incurred. These regulations ensure that employees are not burdened with expenses related to normal business operations and are fairly compensated for any job-related expenditures.

Final Paycheck

In Vermont, if an employer terminates an employee, the employee should receive their final payment within 72 hours from the time of termination. In the case of an employee voluntarily resigning from their position, they are entitled to payment on the last regular payday. If there is no established regular payday, the employee should receive their payment on the following Friday.

Step-by-Step Guide to Payroll in Vermont

Navigating Vermont’s employment laws is vital for businesses. In this segment, we’ve provided a step-by-step guide to help you stay compliant, streamline your payroll processes, and maintain records efficiently.

  1. Get Your Business on IRS Records: Start by getting an Employer Identification Number (EIN) for your business, a unique nine-digit code used by the IRS to track tax-related activities. You can apply for an EIN online using Form SS-4 before creating your payroll process flowchart.
  2. Vermont State Registration: If your business is in Vermont, it’s crucial to register with state authorities. New businesses can complete this on the Vermont Secretary of State’s official website. If you have employees in Vermont, you also need to register with the Vermont Department of Taxes.
  3. Classify Your Employees Right: Make sure to correctly label your workers as employees or independent contractors in Vermont. Using tools like the Common Law Test can help you avoid legal issues and financial penalties.
  4. Collect Employee Paperwork: When hiring in Vermont, gather important forms during onboarding, like the I-9 verification and Vermont’s version of the W-4, called the Employee’s Withholding Tax Exemption Certificate (Form VT-W-4).
  5. Keep Track of Time and Attendance: Set up a system in Vermont to track employee time, including defining workweeks, calculating overtime, managing breaks, and handling leave. Time and attendance software can make this process more accurate and efficient.
  6. Stick to a Payroll Schedule: Establish regular pay periods in Vermont and make sure to distribute paychecks on time, following state rules and regulations.
  7. Follow Vermont Payroll Tax Rules: Abide by Vermont’s Department of Taxes guidelines for state payroll taxes, including unemployment tax. Make sure to deposit employment taxes on time as per the assigned schedule.
  8. Keep Records in Order: Maintain detailed records for all Vermont employees, both current and former, as required by federal and state laws. 
  9. Wrap Up Annual Payroll Reports: At the end of each year in Vermont, put together important payroll reports, such as W-2 Forms and 1099 Forms. Give these forms to your employees no later than January 31 of the following year, in line with federal and state regulations.

Final Thoughts

Managing payroll in Vermont presents distinct challenges. It’s essential for individuals to navigate the state’s specific minimum wage requirements, tax obligations, and labor laws. To streamline the payroll management process, you can explore our recommendations for the top 6 applications tailored to streamline payroll duties in the United States. If you’re already using a system, we’ve detailed ten tips to enhance your payroll procedures 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.

 

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