What Is Payroll Responsible for Under Federal Law vs State Law?

Short answer: Payroll is responsible for complying with both federal and state wage, tax, and recordkeeping laws. Federal law sets nationwide minimum standards. State law can add additional requirements but cannot reduce federal protections. When both apply, payroll must follow the rule that is more protective of the employee.

According to the U.S. Department of Labor, federal payroll responsibilities include minimum wage, overtime pay, payroll recordkeeping, and child labor protections. State payroll laws often expand on those requirements through higher wages, additional overtime rules, paid leave mandates, or stricter pay timing rules.

This blog explains exactly what payroll is responsible for under federal law versus state law, and how those responsibilities work together in practice.

What This Is

This is a clear, definition-first explanation of payroll responsibilities under federal law compared to payroll responsibilities under state law. It explains what payroll must do, why the rules exist, and how employers are expected to comply.

What This Is Not

This is not an employer policy, payroll software guide, or legal loophole. It is not advice based on preference or convenience. Payroll responsibilities are defined by law, not by software defaults or internal policies.

Who It Applies To

This applies to employers in the United States who pay wages to employees, including private businesses, nonprofits, and public employers. Federal payroll law applies when an employer is covered by the Fair Labor Standards Act (FLSA). State payroll law applies based on where the employee works.

Who It Does Not Apply To

Properly classified independent contractors are not subject to payroll withholding rules because they are not employees. However, misclassification does not remove liability. If a worker is legally an employee, payroll responsibilities still apply regardless of how the worker is labeled.

What Payroll Is Responsible for Under Federal Law

Under federal law, payroll is responsible for meeting the requirements set by the Fair Labor Standards Act (FLSA) and the Internal Revenue Code.

Federal payroll responsibilities include paying at least the federal minimum wage, which is $7.25 per hour as of January 2026. Employers covered by the FLSA must pay non-exempt employees overtime at one and one-half times the regular rate for all hours worked over 40 in a workweek.

Payroll is also responsible for maintaining accurate payroll records. Federal law requires employers to track hours worked, wages paid, additions and deductions, and pay dates. These records must be retained for specific periods and be available if requested by the Department of Labor.

In addition, payroll must withhold and remit federal payroll taxes. This includes federal income tax withholding, Social Security tax, and Medicare tax. Employers must deposit these taxes on required schedules and report them using IRS forms such as Forms 941, W-2, and W-3.

Federal payroll law also includes child labor protections, which restrict the hours and types of work minors are allowed to perform.

These responsibilities are enforced by the U.S. Department of Labor and the Internal Revenue Service.

What Payroll Is Responsible for Under State Law

State payroll responsibilities vary by state but often build on federal requirements.

Many states require a higher minimum wage than the federal rate. When a state minimum wage is higher, payroll must pay the state rate. Federal law does not override higher state wages.

Some states impose additional overtime rules. For example, certain states require overtime pay after a set number of hours worked in a day, not just after 40 hours in a week. Payroll must follow these rules when they apply.

State payroll responsibilities often include withholding state income tax and paying state unemployment insurance contributions. Some states also require payroll deductions for paid family leave or disability programs.

States frequently regulate how often employees must be paid and how quickly final paychecks must be issued after termination. These rules affect payroll scheduling and processing timelines.

Many states also impose their own payroll recordkeeping requirements, which may go beyond federal rules.

How Federal and State Payroll Laws Work Together

Federal law sets the baseline. State law can add protections but cannot reduce federal standards.

If federal minimum wage is $7.25 and a state minimum wage is $12.00, payroll must pay $12.00. If federal overtime requires weekly overtime and state law requires daily overtime, payroll must apply both when applicable.

Payroll must comply with both systems simultaneously. When there is a difference, the rule that provides greater protection to the employee must be followed.

Common Misunderstandings

“Federal law overrides state payroll law.”
This is false. Federal law establishes minimum standards. States are allowed to impose stricter requirements.

“Payroll software ensures compliance.”
This is false. Software can calculate pay, but employers remain legally responsible for correct payroll compliance.

“Salary pay eliminates overtime.”
This is false. Overtime eligibility depends on meeting specific exemption criteria, not simply being paid a salary.

Real-World Examples

An employee works in a state with a minimum wage higher than the federal rate. Payroll must pay the higher state wage, even though federal law allows a lower rate.

An employee works in a state that requires daily overtime after eight hours in a day. Payroll must pay daily overtime even if the employee does not exceed 40 hours for the week.

A state requires paid sick leave accrual. Payroll must track accruals and ensure paid leave is applied correctly when used.

What Employers Should Do

Employers should identify which federal payroll rules apply to their workforce and which state laws apply based on employee work location. Payroll systems should be configured to apply the more protective rule when federal and state laws differ.

Employers should stay informed of federal and state payroll law changes and ensure payroll processes are reviewed regularly for compliance.

What Employees Should Know

Employees are entitled to the higher of federal or state minimum wage. Overtime rights may vary by state but must always meet federal minimum standards. Employees can have additional protections under state law beyond federal requirements.

How Journey Payroll & HR Can Help

Journey Payroll & HR helps employers manage payroll with federal and state compliance at the core. Federal payroll law establishes the baseline requirements, while state payroll laws add layers that payroll systems must apply correctly and consistently. Our team ensures both are handled accurately, so employers are not left guessing which rule applies.

We support businesses by configuring payroll systems to follow the most protective standard when federal and state laws differ, monitoring wage and hour changes, and helping employers stay aligned with evolving payroll requirements. When payroll is handled correctly under both federal and state law, businesses reduce compliance risk and employees are paid accurately and on time.