Payroll Laws, Taxes and Regulations In South Carolina

Running a business in South Carolina means dealing with specific payroll requirements. South Carolina employers must handle both federal and state taxes, with different rules for each. South Carolina businesses need to withhold state income taxes from employee wages and understand the state's unemployment tax system, which has rates that may change yearly based on the trust fund's balance.

Good news for South Carolina employers in 2025 - tax rates for businesses will decrease or remain unchanged from their 2024 levels, with no solvency surcharge imposed. Companies must also collect federal taxes like Medicare and Social Security while following state-specific rules such as withholding taxes for nonresidents who perform services within South Carolina.

Key Takeaways

• South Carolina employers must withhold state income taxes and follow specific rules for both resident and nonresident employees.
• Unemployment tax rates for 2025 will decrease or remain unchanged from 2024 levels with no solvency surcharge.
• Businesses must comply with both federal payroll requirements and South Carolina-specific regulations to avoid penalties.

Payroll Laws, Taxes And Regulations In South Carolina

South Carolina employers must follow specific state and federal payroll regulations to remain compliant. These rules cover everything from tax withholding requirements to proper employee classification.

Mandatory Employer Payroll Responsibilities

Employers in South Carolina must withhold state income taxes from employees working within the state. This applies regardless of where the employee lives - if they work in South Carolina, their income is taxable in South Carolina.

Companies must also pay:

• Federal FICA taxes (Medicare and Social Security)
• State unemployment insurance tax
• Federal unemployment tax (FUTA)

Tax filing deadlines vary based on deposit schedules. Most employers must deposit withheld income taxes and FICA taxes monthly or semi-weekly depending on their tax liability history.

Businesses should note that holiday pay is not mandatory in South Carolina. However, if offered, it must be consistently applied according to the company's established policy.

Employee Classification Rules

Proper worker classification is crucial for South Carolina businesses. Misclassifying employees as independent contractors can result in serious penalties and tax compliance issues.

To determine classification, South Carolina follows federal guidelines focusing on:

• Level of behavioral control
• Financial relationship between parties
• Nature of the working relationship

Business expenses handling differs between classifications. For employees, employers typically reimburse expenses and cannot deduct them from wages below minimum wage. For contractors, expense responsibility falls on the contractor unless otherwise specified in contracts.

Remote workers present unique classification challenges. Even if working remotely, employees performing services in South Carolina are subject to state payroll taxes and labor laws.

Setting Up Payroll For South Carolina Businesses

Establishing payroll in South Carolina requires specific registrations with state and federal tax authorities and implementing an efficient system to manage employee payments and tax withholdings.

Registering For State And Federal Tax IDs

Before processing your first payroll in South Carolina, you'll need to obtain the necessary tax identification numbers. First, apply for a Federal Employer Identification Number (EIN) from the Internal Revenue Service. This nine-digit number identifies your business for federal income tax purposes and is required regardless of your business structure, including partnerships.

Next, register with the South Carolina Department of Revenue (SCDOR) for a state withholding account. You can complete this registration through MyDORWAY's Business Tax Application, which allows you to apply online for necessary business tax accounts. South Carolina employers must withhold state income tax from employee wages according to the Internal Revenue Code guidelines.

You'll also need to register with the South Carolina Department of Employment and Workforce for unemployment insurance. Registration deadlines vary based on your business circumstances, but typically should be completed before hiring your first employee.

Choosing A Payroll System

Selecting the right payroll system is crucial for South Carolina businesses to maintain compliance and efficiency. You have several options:

In-house processing: Managing payroll internally using spreadsheets or basic accounting software. This works for very small businesses but requires significant knowledge of tax requirements.

Payroll software: Dedicated programs that automate calculations, tax withholdings, and filing. These solutions help ensure you're following proper withholding tax payment schedules for both federal and state requirements.

Full-service providers: Companies that handle all aspects of payroll processing, including:

• Tax calculations and payments
• Direct deposits
• Tax form preparation
• Compliance updates

For startups and growing businesses, outsourcing payroll often proves cost-effective as it reduces administrative burden and minimizes compliance risks with changing regulations.

South Carolina Payroll Taxes

Employers in South Carolina must handle both federal and state-specific payroll taxes. These obligations include withholding state income taxes from employee paychecks and making unemployment insurance contributions to the state fund.

State Income Tax Withholding

South Carolina requires employers to withhold state income tax from employees' wages. The withholding amount is based on the employee's taxable income earned in South Carolina, regardless of where the employee lives. This means if someone works in South Carolina but lives in another state, their South Carolina earnings are still subject to state withholding.

Tax rates in South Carolina range from 0% to 6.5%, with the highest rate applying to income over $16,040. Employers must register with the South Carolina Department of Revenue before withholding taxes.

Filing frequencies depend on total withholding amounts:

• Monthly: For most employers
• Quarterly: For employers with small withholding amounts
• Semi-weekly: For employers with large withholding amounts

If your withholding tax exceeds $15,000 or you make 24+ payments yearly, electronic filing and payment are mandatory.

Unemployment Insurance Contributions

All South Carolina employers must pay unemployment insurance taxes to fund benefits for eligible unemployed workers. New employers typically start with a standard rate of 1.55%, while established employers receive rates between 0.06% and 5.46% based on their unemployment history.

The unemployment tax applies to the first $14,000 of each employee's annual wages (the taxable wage base). South Carolina payroll tax requirements mandate that employers register with the Department of Employment and Workforce (DEW) and file quarterly reports.

For 2025, the average UI tax rate is approximately 0.95%. Employers with positive payment histories can qualify for lower rates, creating potential savings for businesses with stable workforces.

Payments and reports are due by the end of the month following each calendar quarter. Late payments incur interest penalties of 0.5% per month.

Compliance With Wage And Hour Laws

South Carolina employers must follow specific wage regulations to avoid penalties and legal issues. Federal laws apply where state laws are absent, creating a dual compliance framework.

Minimum Wage Requirements

South Carolina has no state minimum wage law, so employers must follow the federal minimum wage requirements under the Fair Labor Standards Act (FLSA). The current federal minimum wage is $7.25 per hour. This rate applies to most employees, with some exceptions for tipped workers, student workers, and certain disabled workers.

All wages must be paid in U.S. money or by check or warrant dated on the payday. Employers cannot pay less than the federal minimum wage even for training periods.

For tipped employees, employers can take a tip credit but must ensure employees receive at least the minimum wage when tips and direct wages are combined.

New businesses should maintain clear records of all hours worked and wages paid to demonstrate compliance during potential audits.

Overtime Pay Rules

South Carolina follows federal overtime regulations since it doesn't have state-specific overtime laws. Under federal rules, employees must receive overtime pay at 1.5 times their regular rate for hours worked beyond 40 in a workweek.

Not all employees qualify for overtime. Exempt employees typically include executive, administrative, and professional staff who meet specific salary and duty requirements. The current minimum salary threshold for exemption is $684 per week ($35,568 annually).

Many South Carolina employers mistakenly classify workers as exempt when they should receive overtime. This common error can lead to significant back-pay liability and penalties.

Employers should clearly document all overtime hours and maintain accurate time records for at least three years to demonstrate compliance with federal requirements.

Reporting And Filing Requirements

South Carolina employers must comply with specific filing deadlines and maintain proper documentation to avoid penalties. Accurate recordkeeping and timely submissions are essential components of payroll compliance.

Payroll Tax Forms And Deadlines

South Carolina employers must file quarterly unemployment tax reports by the last day of the month following each quarter. The state uses Form UCE-120 for unemployment tax reporting. If you have 10 or more employees, you must file these reports electronically as required by Section 41-31-160 of South Carolina law.

For state income tax withholding, employers file Form WH-1601 quarterly. The deadlines are April 30, July 31, October 31, and January 31. If your withholding tax amounts to $15,000 or more, or you make 24 or more payments yearly, electronic filing is mandatory.

Annual reconciliation using Form WH-1606 must be submitted by January 31 each year. Additionally, employers with at least 10 W-2 or 1099 forms must submit them to the South Carolina Department of Revenue through MyDORWAY.

Recordkeeping Best Practices

Businesses should maintain comprehensive payroll records for at least four years, including employee information, tax withholding authorizations, and payment details. Store both physical and digital copies of all tax forms, employee time records, and payment information in a secure location.

Create a payroll calendar marking all important tax deadlines to ensure timely submissions. Consider using accounting software to automate record organization and tax calculations, reducing errors and saving time.

Back up all digital records regularly and implement a consistent filing system for easy retrieval during audits. Keep copies of all tax payments and filings, including confirmation numbers from electronic submissions.

Review your recordkeeping practices quarterly to identify potential issues before they become problems during an audit.

Common Payroll Mistakes In South Carolina

Businesses operating in South Carolina face specific payroll challenges that can lead to costly errors and compliance issues. These mistakes often occur in worker classification and tax payment timing, creating financial and legal complications.

Incorrect Worker Classification

Many South Carolina employers mistakenly classify workers as independent contractors when they should be employees. This error has serious consequences, including unpaid employment taxes and potential penalties. The South Carolina Department of Revenue closely monitors this issue.

Key indicators of misclassification include:

• Controlling how and when work is performed
• Providing tools and equipment
• Setting fixed work hours
• Paying by hour/week rather than by project

Businesses should review the IRS 20-factor test to properly classify workers. When in doubt, consult with a payroll professional who understands South Carolina labor laws.

Misclassification can trigger audits and result in back taxes, penalties, and interest. Small businesses particularly struggle with this issue when trying to manage costs.

Late Tax Payments

Missing deadlines for South Carolina payroll tax payments is a common and costly mistake. The state imposes penalties for late submissions of withholding taxes and unemployment insurance contributions.

South Carolina requires employers to:

• File quarterly returns for withholding taxes
• Submit unemployment insurance contributions by specified deadlines
• Remit taxes monthly, quarterly, or annually based on liability

Penalties for late payments start at 5% and can increase substantially. Many businesses face unauthorized deductions issues when trying to recover from tax payment errors.

Setting up automatic payment reminders or using payroll software with built-in compliance features can help prevent missed deadlines. Companies should also maintain updated employee records to ensure accurate withholding calculations and timely submissions.

Best Practices For Payroll Compliance

Following proper payroll compliance procedures helps South Carolina businesses avoid penalties and maintain good standing with tax authorities. These practices create efficiency and reduce risks associated with payroll management.

Staying Up To Date With Regulations

South Carolina employers must regularly check for updates to state and federal payroll regulations. The South Carolina Department of Revenue and Department of Employment and Workforce frequently update their requirements.

Sign up for email alerts from both agencies to receive timely updates about tax rate changes and filing deadlines. Many tax compliance resources for employers are available to help track these changes.

Consider designating a specific staff member to monitor regulatory changes. This person should review updates quarterly and communicate changes to all relevant team members.

Schedule annual payroll compliance audits to identify and correct any issues before they become problems. These audits should verify tax withholding rates, overtime calculations, and proper employee classification.

Keep detailed records of all compliance activities, including dates when policies were updated and who approved the changes.

Leveraging Payroll Software

Using specialized payroll software significantly reduces compliance risks for South Carolina businesses. Modern payroll systems automatically calculate state unemployment insurance rates and handle tax withholdings accurately.

Look for software that offers South Carolina-specific tax tables and automatic updates when tax laws change. The best systems will also generate required state filing documents and track submission deadlines.

Cloud-based payroll systems provide anywhere access to payroll data, making it easier to process payroll even when working remotely. Many platforms also offer employee self-service portals where workers can access their pay stubs and tax documents.

Set up automated reminders for important filing dates like quarterly tax submissions. This prevents missed deadlines that can result in penalties.

Ensure your payroll software integrates with your time tracking and accounting systems to minimize manual data entry errors.

Frequently Asked Questions

South Carolina employers must navigate specific payroll tax requirements and comply with state regulations to avoid penalties. Here are answers to common questions about managing payroll in the state.

How can employers calculate payroll taxes accurately in South Carolina?

Employers in South Carolina need to apply the state's progressive tax rate system when calculating withholding taxes. The rate varies based on employee income levels.

To calculate accurately, use the most current withholding tables provided by the South Carolina Department of Revenue. These tables help determine the correct amount to withhold based on employees' earnings and withholding allowances.

Remember that if an employee doesn't submit a new SC W-4 by February 15 each year, you should withhold taxes as if the employee is single with zero allowances.

What recent changes have been made to South Carolina's payroll law?

For 2025, South Carolina has updated its withholding tax tables to reflect inflation adjustments. These changes affect how much employers need to withhold from employee paychecks.

The state has also streamlined electronic filing requirements for employers with more than 25 employees, making online submissions mandatory.

Recent modifications to unemployment insurance contribution rates have been implemented based on the state's trust fund balance.

Which taxes are employers in South Carolina legally required to withhold from employee paychecks?

Employers in South Carolina must withhold state income taxes from employee wages. This applies to all employees working in South Carolina, regardless of their state of residence.

In addition to state taxes, South Carolina employers must pay FICA taxes at the federal level, which include Medicare and Social Security contributions.

Local taxes may apply in certain municipalities, so check with specific county or city tax authorities for additional withholding requirements.

How do new employers determine the correct unemployment tax rate in South Carolina?

New employers in South Carolina typically receive a standard unemployment tax rate of 1.55% for the first 24 months of operation. This rate applies to the first $14,000 of each employee's wages.

After the initial period, the Department of Employment and Workforce will assign an experience-based rate. This rate depends on your company's history of unemployment claims.

To establish your account, register with the South Carolina Department of Employment and Workforce within 20 days of hiring your first employee.

What steps must be taken to properly file withholding taxes in South Carolina?

Register for a withholding tax account with the South Carolina Department of Revenue before hiring employees. You'll receive a withholding tax number required for all filings.

File quarterly withholding tax returns (WH-1605) by the last day of the month following each quarter. Annual reconciliation (WH-1606) must be submitted by January 31 each year.

Issue W-2 forms to all employees by January 31 showing wages paid and taxes withheld during the previous year.

What are the penalties for non-compliance with payroll tax regulations in South Carolina?

Failure to file withholding tax returns can result in penalties of 5% of the tax due for each month the return is late, up to 25% of the tax amount.

Late payment penalties start at 0.5% per month and can increase to 25% of the unpaid tax. Interest also accrues on unpaid taxes at rates set by the Department of Revenue.

Criminal penalties may apply for willful evasion of tax requirements, including potential fines up to $10,000 and imprisonment for up to 5 years in severe cases.

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