The Wage & Hour (W&H) division of the U.S. Department of Labor has increased its enforcement and audit efforts with employers. The Wage and Hour division wants to ensure workers are fairly paid and employers uphold the law. Unfortunately, businesses that have violated wage and hour laws can face heavy fines and penalties. Many employers often assume a low likelihood of being audited for payroll, but they can be targeted, and the likelihood of an audit has been increasing.
An audit can be announced or unannounced. Usually, it occurs when an employee formally complains to the Department of Labor (DOL) about wages and/or hours concerns. The Wage and Hour division sometime randomly "targets" specific industries for investigation. In the last few years, the Department of Labor visited a wide array of employers in industries such as hospitality and restaurants, healthcare, day care, retail, temporary staffing, among others.
Non-Complaint Business. Certain employers may be high on the DOL watch list especially for repeat violations including:
- Failure to maintain accurate timekeeping and payroll records and overtime payments to non-exempt employees.
- Salaried employees classified as exempt from overtime without assessment of the performed job duties.
- Unlawful wage deductions for items (e.g., cash register shortages, uniforms, etc.) against employees.
- Inaccurate payment to immigrant workers and minors who receive less than minimum wage requirement.
- Insufficient tips that do not adequately make up the difference between minimum wage and employer's wage obligations.
Penalties and Recourse
During the audit if the investigators uncovers violations they will attempt to resolve any issues of compliance, or payment of back wages, but be aware the FLSA provides for the following recourses as noted right from US Department of Labor Wage and Hour Division Fact Sheet #44:
While many of the above provisions are found in laws administered by the W&H, there are also many state and local labor laws, that have to be complied with as well that can also result in enforcement penalties or law suits.
- An employee may file suit to recover back-wage, and an equal amount in liquidated damages, plus attorney's fees and court costs.
- The Secretary of Labor may file suit on behalf of employees for back wages and an equal amount in liquidated damages.
- The Secretary may obtain a court injunction to restrain any person from violating the law, including unlawfully withholding proper minimum wage and overtime pay.
- Civil money penalties may be assessed for child labor violations and for repeat and/or willful violations of FLSA's minimum wage and overtime requirements.
- Employers who have willfully violated the law may face criminal penalties, including fines and imprisonment.
- Employees who have filed complaints or provided information during an investigation are protected under the law. They may not be discriminated against or discharged for having done so. If they are, they may file a suit or Secretary of labor may file a suit on their behalf for relief, including reinstatement to their jobs and payment of wages lost plus monetary damages.
Be ready if ever a DOL representative visits your business to conduct an audit. Consider the following actions:
- Have an interview room mad privately available only between you and the DOL representative.
- Ensure that all required labor law posters are up-to-date, highly visible, and posted in common areas.
- Revisit time-tracking devices or methods to determine accuracy of actual time worked.
- Review and organize payroll records since DOL may check up to the last three years of the wage-and-hour records and any documented practices and procedures.
In all, it's best to prepare now instead of gambling and worrying about whether or not random audits and compliance investigations by the DOL may occur. Plan as if an audit will occur, unless you as the employer can easily afford paying thousands of dollars in fines and penalties. Find ways to determine good faith efforts of understanding and effectively resolving any employee's complaint about your company's compliance to wage and hour laws.
Business owners do not realize that former employees can establish an unemployment claim very easily. Simply terminating an employee with cause including substandard performance does not disqualify the employee from collecting unemployment. In most states the employee's behavior has to an egregious overstep or be considered inappropriate misconduct for the employee to be denied the ability to collect unemployment.
Employees terminated for an inability to perform their job because of a lack of skill or knowledge, underperforming, or just incompetence will in most instances capable of collecting unemployment benefits.
For employers to terminate an employee with cause and not have that employee collect unemployment, the employer will have to demonstrate the employee's behavior did rise to the level of "misconduct" as written in that state's law. The burden is on the employer to prove that the terminate employee either knew or should have known they would be terminated if the behavior in question continued.
A critical area that many small and growing businesses overlook is their HR policies and procedures. It is why a clearly defined policy with steps to handle these situations is critically important. The company should have clear supporting documentation that details and illustrates to a reasonable person how the employee's behavior and misconduct crossed the line, what steps were taken to notify the employee of his or her behavior and what recurred. In some cases the behavior may be so egregious that the employee was terminated immediately with cause such as criminal misconduct.
Here are a few suggestions that will help a business to proactively manage the process and not find itself in the unenviable position of fighting unemployment claims.
1. Have a policy in place that provides employees with a written warning regarding a violation of the company's HR policies prior to termination. There is currently no federal labor law that requires a private, non-unionized organization to issue written warnings prior to terminating his or her services. However, showing that you attempted to have the employee correct their behavior and correct the issue prior to termination will help you fight the unemployment claim. It is also good policy, if you outline in your HR procedures employees will be given an opportunity to correct their conduct prior to termination, it is good policy to follow those procedures.
2. Have an Employee HR Handbook in place and obtain written acknowledgment from employees they received a copy. Employers should be able to cite specific HR violations in order to have a chance of fighting unemployment claims. When you have written acknowledgment forms on file for each employee, it is proof that each employee was made aware your HR policies, procedures guidelines and of the consequences of noncompliance to your policies.
3. All discrimination, workplace complaints, harassment and any other serious workplace complaints should be investigated and documented fully. An employer can find itself in a position of loosing a fight over an unemployment claim if the employee resigned with "good cause." If the employee demonstrates they brought a serious workplace issue to your attention, such as a non-safe work environment or harrasment from a fellow worker, and it was not investigated or addressed, the employee will most likely be awarded the unemployment benefits.
4. Use the "reasonable person" standard. It is a common standard when making deicions about termination. Consider whether a reasonable person would terminate an given the present circumstances.
5. Treat employees fairly and with respect in regards to termination decisions. State employees that process unemployment claims are themselves employees. They will have opinions, whether right or wrong about the process and whether they felt it was fair. Finally, your previous history and past practices of how you handled similar situations will be part of the determining factor. If an employee can demonstrate that the termination aligned with the companyy's policies and past practices, it will be more difficult for the employee to successfully make an unemployment claim.
The pros and cons of any termination decision should be considered carefully. There are times when a situation is correctable and other times when a termination is warranted. The potential cost of an unemployment claim can be insignificant when compared against the cost of continued employment for an individual.
Do you know if you outsource your payroll, you are still held liable for all payroll taxes due? Many owners and corporate officers believe that once they outsource payroll the responsibility for submitting payroll taxes and filing payroll reports resides with the payroll company. That is not true. The IRS and other government revenue collecting agencies hold the owner(s) and corporate officers liable for any unpaid payroll taxes, improperly filed payroll reports, or failure to file payroll reports.
Common Payroll Practice Can Hurt Your Cash Flow
A common practice for payroll companies is to impound funds. This simply means they withdraw all payroll expenses including payroll wages and all payroll taxes when they process your payroll.
They transfer the monies from your account to their account, collecting interest on it, until it is time to make payments. At any given time a payroll company can have hundreds of thousands of dollars to billions of dollars in their account accruing interest. In Paychex's most recent financial statement, just released last month, they reported revenue of over $41 million in interest income just from impounded funds. The number is even larger for ADP.
Most small businesses are setup as monthly depositors. This simply means that you do not have to deposit payroll taxes (federal income taxes withheld, SS tax, Medicare taxes and many state and local taxes) until the 15'th of the following month. For example, for a monthly depositor, payroll taxes would not be due until September 15th for any wages paid in August.
If you are looking to manage your cash flow using a company that impounds funds does not provide you with that flexibility.
Loss of Accountability with Impounded Funds
When funds are moved from your bank account to a vendors bank account you loose visibility and cannot readily track payments made to regulatory agencies. How do you know or track your IRS or state tax payment if it is being sourced from an account you do not have access to?
The IRS published a list of examples of recent companies and individuals that have been prosecuted because the owner(s) or person(s) responsible for payroll committed fraud and covered their tracks. These are just three of many. You can find a more comprehensive list of companies and employees committing payroll fraud here.
The owner of Paysource, a Dayton, Ohio based professional employer organization which provided services that enabled business owners to outsource the engagement of human resources, employee benefits, payroll and workers' compensation, was convicted on conspiracy to defraud the United States. They were found guilty of impeding the IRS, money laundering and tax evasion. The owner directed co-conspirators to prepare fraudulent IRS forms claiming that wages paid by the company and the resulting tax liability were significantly lower than what the company actually paid.
2. Bookkeeper Sentenced for Embezzlement and Tax Evasion
A bookkeeper for a wholesaler of greenhouse supplies was convicted of embezzlement and evading federal payroll taxes. She was ordered to pay $1,843,674 in restitution. Dawson worked as the bookkeeper, where she maintained payroll, prepared payroll tax returns, and paid withheld taxes to the IRS. From January 2007 through November 2011. In addition, to not paying the company's payroll taxes and not filing a payroll tax return she also defrauded the business by paying her personal credit card expenses from the business account.
3. Owner of North Carolina Payroll Company Sentenced for Fraud and Money Laundering
Arthur S Weiss, owner of a professional employer organization, was sentenced to 185 months in prison and ordered to pay more than $7 million in restitution to victims. His company provided payroll-related services to business clients. For his business clients he agreed to pay the employees, withhold and remit federal and state payroll taxes, prepare and file the federal and state employment tax returns and provide workers compensation insurance. Although he paid the employees and withheld the taxes, he did not submit over $4 million in payroll taxes, instead keeping them for his own personal use.
These are just three examples of payroll companies or an employee stealing from the business or businesses and employees they were working with and for. As a business owner or officer of the company, here are a couple of things that you should do to prevent this from happening to you:
1. Don't let your payroll company impound taxes. Impounding is a common practice in the payroll industry. Payroll companies pull out all your funds from your bank account (including all your payroll taxes) and deposit it into their bank account. They make money on the "float" i.e., interest from when the time the money is pulled from your account to when they have to make the deposit.
When you allow a company to impound you have no bank record transaction to confirm the taxes were paid. With our clients we setup payments so the money is moved from the client's bank account to the revenue collecting agency. There is always visibility and the bank transactions are recorded in the client's bank account as verification that tax payments were actually made.
2. Request copies of verification that taxes were paid. Sign up for access to the Electronic Fund Transfer Program (EFTPS). It is available free from the Treasury Department and gives employers on-line access to their payment history based on their EIN number. It allows a company to verify that their payroll vendors is making the scheduled tax deposits.
3. Follow-up on all notifications received by the IRS or any revenue collecting agency. All of them are time sensitive and must be dealt with immediately. If your payroll vendor has "taken care of it" ask for confirmation. Don't hesitate to speak with the IRS even if you believe the matter was resolved or taxes were paid. But also remember the IRS and other agencies do make mistakes. It is not uncommon for us to respond to an issue of a tax payment because of an error on the part of the revenue collecting agency.
We work with many small businesses and are amazed at the number of Charlotte, NC small businesses that do not use an employee time and attendance system or how an automated timekeeping system can save them money.
We will break down the many benefits of using a system into two articles. The first will cover how much, even a small company with as few as 10 employees, can save by using a timekeeping system. The second article will cover how an automated timekeeping system helps you comply with regulatory wage and labor laws and why it will be increasingly important with the implementation of the Patient Protection Affordable Care Act (Healthcare) to have a system to track time for your employees.
Why an Automated Timekeeping System
According to the American Payroll Association (APA), companies can save 2-percent of gross payroll costs each year if they automate their time and attendance process. Many small businesses continue to use a manual process to track time. They do this using a manual time sheet, Excel spreadsheet or a mechanical timeclock. Many of these companies understand the power and savings of automation, as they have already invested in technology and automation for other parts of their business.
Manual timekeeping processes are tedious and often error-prone. Many are archaic processes that require an administrator to collect handwritten timesheets, transcribe the data into an Excel spreadsheet or some other software application and in some cases reenter it into a payroll software data entry page.
This process leaves open the opportunity for "padding" the hours by your employees, transcription and data entry problems and additional time required by your payroll administrator to collect and enter the data. Finally, overpaying payroll wages will cause you to incur additional payroll taxes and larger worker compensation fees.
Cost Savings with an Automated Employee Time Tracking System is Big
There are four ways you can save with a timekeeping system:
1. As an Employer you will not pay your employees for hours they do not work. Do you know how many of your employees show up five, ten, fifteen minutes late? How many leave early? How many say they will make up time but never do? How about those who take an extra five minutes during a break? With an automated time and attendance tracking system, they only get paid for the hours worked and not phantom hours.
2. It cuts down on the time required for the payroll administrator to prepare payroll. No longer will your administrator have to distribute timesheets, collect them, manually enter them into a spreadsheet and/or reenter them into a payroll software entry screen. The payroll reports are immediately available. With a few edits payroll data would be ready for payroll processing.
3. Payroll errors are reduced. Often times with a manual time tracking system, employees are over or under compensated for their time. Any employee that feels they were under compensated or shorted hours will immediately make it known to the payroll administrator. This causes additional administrative costs (time required to correct issue, reissue checks and will cause you to incur additional payroll charges from your payroll processor). The employees that are over-compensated will more than likely not notice or not bring it to you attention, unless it is such a significant difference and realize you will notice.
4. Social Security and Medicare taxes and Worker Compensation fees are tied directly to your payroll wages. As wages for your payroll increase so do payroll taxes and worker compensation charges. Payroll taxes are 7.65% and worker compensation fees can add 2.5% or more to your total payroll cost. Reducing payroll wages will reduce your payroll tax obligations and worker compensation payments.
How Much Can I Really Save with A Time and Attendance System?
Here is a conservative example of how much a company with just 10 full time employees can save:
The company has 10 full time employees that get paid an average rate of $15 per hour. Weekly compensation per employee is $600/week and annual compensation is on average $31,200 per employee.
Total payroll for the company is $312,000 (10 employees multiplied by $31,200 per employee).
The payroll administrator requires 2.5 hours every other week to track down, collate and enter the time in a spreadsheet and other payroll data entry applications.
Savings from Item 1 (Overpaying employees for hours not worked)
Let's be conservative and assume it is on average only 5 minutes per day per employee that come in a few minutes late, leave a few minutes early or take a few extra minutes at lunch or during a break. Many employees will do this without realizing it. Five minutes is truly below the radar and even the best employees may not even know it is occurring.
Five minutes per employee add up to an extra 50 minutes (0.83 hours) of pay per day. This works out to be an extra $12.50 per day, $62.50 per week or an additional $3,250 per year. If you have 20 employees you can double this cost, for thirty employees increase it by a factor of 3, etc. If it averages more than 5 minutes per day per employee than the cost to you is even greater.
- Annual Savings of Not Overpaying = $3,250/year
Savings from Item 2 (Payroll Administration Cost)
If the manual process requires your administrator to spend 2.5 hours every other week to distribute, collect, collate and enter data to prepare payroll for processing and you can reduce that down to 0.5 hours you realize a savings of 2 hours per pay period.
If the administrator is being paid $20 per hour the savings is $40 every other week or an annual savings of $1,040
Savings from Item 3 (Error Rate Associated with Manually Managing Payroll)
The American Payroll Association estimates that there are between 1% and 8% processing errors for payroll. Assume that your payroll processing errors is only 2% - on the very low side because you have a good administrator. With an annual gross payroll amount of $312,000 and an error rate of 2% the total cost to you is 2% multiplied by $312,000 or $6,240.
Savings from Item 4 (Savings from Social Security and Medicare taxes and Worker Compensation Charges)
If you add up the savings listed above you would save an additional 7.65% plus whatever additional worker compensation charges you pay. Even if you are paying a 2.35% workers comp rate the workers comp rate of 2.35% plus the 7.65% in payroll taxes add up to 10% in additional tax savings.
The total savings listed above is $10,530 ($3,250 + $1,040 + $6,240 = $10,530)
Multiply these savings by 10%. The additional savings is $1,053
Adding the $1,053 to the other savings above ($10,530) equals a total savings of $11,583.
- Total Estimated Annual Savings = $11,583
Are you a small business owner that can use an extra $11K?
What will an Automated Timekeeping System Cost?
The good news for an employer is not nearly as much as you think especially considering the cost savings it provides. For example our system for a small employer with 10 employees can be implemented for less than $50 per month. Sounds like an easy decision to make - an investment of $600 per year to save over $11,000 per year. The savings are even more dramatic with more employees and/or the employees you have are abusing your current attendance and tardiness policies.
Mistakenly classifying an employee as an Independent Contractor can result in a significant back tax bill and heavy fines. Over the past few years the IRS has aggressively been pursuing employers who misclassify their workers.
Central to an IRS investigation into the classification of a worker is how much "control" an employer exerts over its workers. The control an employer has over a worker can be broken down into three areas:
Behavioral Control - factors pertaining to job instructions, training, etc.
Financial Control - factors pertaining to investment expenses, profit/loss, etc.
Relationship of the Parties - factors that cover employee benefits, written contracts, etc.
When evaluating these areas, the IRS uses twenty different factors to determine the relationship between the employer and worker and the amount of control that is exerted by the employer over the worker.
In this article we highlight five questions from the list of twenty, the IRS will consider when determining the appropriate classification of a worker. To obtain a complete list of the twenty questions, you may go here to obtain a complimentary copy.
1. Profit or Loss
Can the worker make a profit or suffer a loss as a result of the work , aside from earned from the project? This falls under financial control and for the Independent Contractor there should involve real economic risk-not just the risk of getting paid. The IRS wants to determine whether the contractor is undertaking a financial risk, where they cannot only make money but run the risk of loosing money.
If the contractor is never at risk of loosing capital and is rewarded with set wages or hourly pay, then the IRS will tend to view that as an employee/employer relationship. if on the other hand, the contractor has to purchase material, pay out wages out of his or her own pocket and runs the risk of loosing money, then it favors the Independent Contractor model.
2. Works for More than One Firm
Does the worker work for more than one company at a time? This can indicate Independent Contractor status but not conclusively. Employees often times work multiple jobs, working at multiple companies. In fact today it is not uncommon for a person to work for 2-3 different employers as a W2 employee.
A good example of an independent Contractor is a freelance writer. If a freelance writer is working for multiple companies at a time, and setting his or her own schedule for working on various projects, it is a strong indicator he or she is an Independent Contractor. On the other hand if the freelance writer is only doing work for one company and has set hours, then that indciates an employer/employee relationship.
Do you have the right to give the worker instructions about when, where and how to work? Any of these factors demonstrates to the IRS behavioral control over the worker.
Consider a plumbing contractor; a general contrator will let the plumber know when a site is ready for him, but will not instruct him on how to do the work, or what hours the plumber has to work. He will provide him or her with a deadline and it is up to the plumber to meet the agreed upon deadline.
Full Time Work
Must the worker spend all of his or her time on the job? independent Contractors choose when and where they will work. if you are directing an employee that he or she must maintain a full time schedule to be employed, it is a strong indicator to the IRS that it is an employee/employer relationship.
Right to Fire
Can you terminate the worker? n Independent Contractor cannot be fired without subjecting you to the risk of a breach of contract lawsuit. This goes to the relationsship of the party where it is governed by a contract.
Fortunately for may employers that have been using 1099 contractors, the IRS does have a voluntary Classification Settlement program. You can read about the VCSP here.
To further assist you we put together a list of the top twenty questions the IRS will ask to determine whther the worker is atruly a 1099 contractor or employee. If you have been or thinking of using 10999 contractors you will want to download this list.
In the last session of congress the US House of Representatives approved the reauthorization of the E-Verify program for three more years. E-Verify is administered by the Department of Homeland Security in partnership with the Social Security Administration. It is a web based program that allows employers to verify that a worker is authorized to work in the United States.
As part of House S 3245, in addition to extending the E-Verify program for three years the immigrant visa programs set to exprire would remain active. Even though bill passed the house the legislation is pending and will not be dealt with until after the election.
In 2011 the US Supreme Court upheld Arizona's 2007 employment verification law requiring businesses to use the Federal E-Verify System. The ruling paved the way for other states to implement E-Verify laws.
Companies using the E-Verify program can reduce exposure to DHS violations and fines. If a company shows a good faith effort to hire individuals authorized to work in the US, they will not be held liable by the Department fo Homeland Security (DHS). A key component to showing the good faith effort and avoiding fines is using the E-Verify System.
For many states, there is a safe harbor provisions that allows companies to avoid liability. For states that have an E-Verify requirements, a knowing violation can result in a company being responsible for back-taxes, penalties and interest. However, as with the DHS if you can demonstrate the same good faith effort to verify an employees eligibility to work in the US by using the E-verify system and maintaining good hiring records you can be sheltered from liability.
Here is the downside to using the E-Verify System:
- It takes time to enroll in the E-Verify System and to check each employee's eligibility
- There are some glitches in the system with some inaccurate data
- If a company hires an indvidual who fails the E-Verify process, the system documents the company's noncompliance. Unless the company is committed to to disqualifying unverified job candidates, they probably should not use the system.
- The information obtained by DHS can also be used for I-9 audits and/or worksite investigations.
- Good record keeping and hiring procedures are critical for every company regardless of whether you have one employee or ten thousand employees. Failure to comply or show complaince through good record keeping leaves the company susceptible to fines and penalties.
- The E-Verify System and having properly filled out I9s on file are two ways for employers to protect themselves from placing undocumented workers on their payroll.
To assist you we have compiled an E-Verify Guide. The Guide shows the states that require companies to use the E-verify System.
As many people do, I subscribe to email newsletters that are relevant to our business or applicable to our clients' businesses. Recently, I received an email newsletter from RestaurantOwner.Com. The featured article was titled No Matter How Tempting , Don't Do It. The topic of the article is payroll taxes. Because of the importance and timeliness of this issue, I wanted to share it's central theme.
Restaurants, like many businesses, have a slow season. During a slow season or economic downturn, businesses are challenged with managing cash flow. While it's tempting to defer tax payments to pay other bills the advice in the RestaurantOwner.com newsletter is: Don't Do It!
"Even though the IRS isn't calling you every few weeks to make sure these taxes are paid, have no doubt that they will be following up very diligently to make sure the taxes were not only paid but paid on time, when they were due.
One reason it's so important to make sure payroll tax deposits are paid promptly is that this money is not yours. It's your employees' money that is withheld from their checks.
The IRS will do whatever it takes (including confiscating your personal assets, house, first born, etc.) to recover unpaid payroll tax deposits. Also the penalties and interest tacked on for making these payments late are Very, Very stiff."
We could not have put this better ourselves. In addition to what is mentioned above, payroll tax avoidance can, in some cases, lead to criminal charges of fraud. As the author indicates, in the newsletter, this money is not yours!
It is very easy to defer payroll taxes with the intention of making them up next week, next pay period or next month. Unfortunately, when you do that, penalties are imposed and interest accrues immediately.
Unfortunately, the further behind you get , the quicker it seems that the tax due dates occur. Before you realize it, you're in debt to multiple government agencies, notices start arriving and with that are sleepless nights and an increased consumption of Tums.
To assist you and help you understand the taxes you as an employer are obligated to make deposits for we put together a payroll Tax Guide summary.
Employers, after hiring a new employee and placing them on their payroll are required, within 3 business days of the start date, to complete the I-9 Form.
The current I-9 Form expired on August 31, 2012. However on August 13, 2012, the US Citizenship and Immigration Services released a bulletin regarding the expiration date of Form I-9. The bulletin stated: "Until further notice, employers should continue using the Form I-9 currently available [...]. This form should continue to be used even after the OMB control number expiration date of August 31, 2012 has passed. USCIS will provide updated information about the new versions of the Form I-9 as it becomes available.
Form I-9 is one of the most important new hire forms that an employer must complete and keep on file after hiring a new employee. Prior to running any payroll for a new employee, an employer should verify that all the new hire paperwork is fully completed and in order. This includes the I-9. failure to have I-9s properly filed out and on files can result in fines and in some cases lead to criminal prosectuion.
By law, it is the employers responsibility to:
- Verify the identity and eligibility of employment in the US for each worker hired.
- Maintain a file for all I-9s which can be provided to investigators upon request.
Employers who violate the law may be subject to civil fines and criminal penalties as outlined in the tables below. In addition if you have government contracts, or intend to compete for government contracts, I-9 violations can cause debarment from government contracts.
The I-9 only takes a few minutes to fill out while the consequences of not filling out and having I-9s on file is severe...why run the risk.
To help organize your employee files, check your compliance and assist you with your hiring and new employee orientation process we have put togther the I-9 form check list.
Their is some good news for taxpayers. Congress has come to an agreement on the payroll tax and this week will likely pass an extension of the payroll tax cut through the end of 2012.
We first posted information about the Payroll tax cut last January. The payroll tax cut was originally implemented in January, 2011 as part of the Job Creations Act, passed in December, 2011. As part of that law, the Social Security tax for employees was reduced from 6.2% to 4.2% for one year. The rate for employers was left unchanged at 6.2%.
This past December a two month extension of the payroll tax cut was passed. It was set to expire on February 29, 2012. The latest compromise in Congress will extend the tax cut through December 31, 2012.
Last month we posted an article on payroll changes for 2012, that can be found here. Employees, in 2012, will have their paycheck reduced by 1.45% for the Medicare tax, 4.2% for the social security tax and by whatever amount is withheld for federal income taxes. For those that work in states or locales with with either state or local income tax, they will have their check further reduced by those taxes as well.
In addition to Congress working out a compromise on the payroll tax cut extension, they will also be extending jobless benefits. A provision that prevents a pay cut for doctors of Medicare patients is also included.
For additional information about payroll taxes, download our Payroll Tax Guide Summary for 2012.
From the HR Pros at Richard A. Beauchemin, CPA /
Carolina Accounting & Tax Services, PLLC
In pursuit of employers who misclassify their workers, the U.S. Department of Labor (DOL) has been aggressively ramping up the number of investigations and its employment law enforcement efforts. We highlighted that in a previous post, which can be found here.
In alignment, the Internal revenue Service (IRS) announced its Voluntary Classification Settlement Program (VCSP), which may offer relief for employers from unpaid employment taxes, penalties, and interest resulting from worker misclassifications. To determine whether or not joining the VCSP would be a smart move, an employer needs to consider some key factors.
Under the VCSP, an employer may voluntarily reclassify their workers as employees for future tax periods for employment tax purposes. To participate in the program, the employer must meet specific eligibility requirements, apply for the VCSP, and enter an agreement with the IRS. An employer may be considered eligible for the program if it:
- Is not subject to a worker misclassification audit currently engaged by a federal or state agency.
- Has consistently treated the workers in question not as employees (i.e., as independent contractors).
- Has filed for the past three years the required Form 1099s regarding the workers.
If the IRS approves the employer's eligibility and participation into the VCSP, then the employer must establish a "closing agreement" with the IRS. The agreement's provisions include, but are not limited to:
- A three-year extension of the statute of limitations for collection of employer back taxes during the first three years upon participating in the program.
- A limit of 10 percent of the employer's employment tax liability that may have been owed on compensation paid to the workers for the most recent tax year, without interest and penalties.
- No audit for employment tax purposes for prior years with respect to the classification of the workers in question.
- Treatment of the identified workers as employees moving forward.
While the VCSP appears attractive at face value, other factors require employers like you to recognize potential risks and, if deciding to participate in the program, to proceed with caution:
- First of all, the IRS is not obligated to accept an employer's application (IRS Form 8952) to the program. So, if an application is rejected, the employer may have in essence, admitted to worker misclassification fault, thus creating a potential case for wage and hour lawsuit claims.
- The IRS relief does not apply to other federal or state agencies (i.e., the DOL) which have similar responsibilities for worker classification compliance enforcement. As established through recent "memorandums of understanding" with participating agencies, IRS information-sharing would likely increase exposure of an employer's liabilities related to worker misclassifications.
- The employer must account for and remedy any previously avoided expenses (i.e., due to failure of complying with minimum wage and overtime laws, of providing company-sponsored employees benefits, of offering workers' compensation and unemployment insurance, etc.).
As more details from the IRS regarding this newly-developed VCSP emerge, employers are encouraged to conduct preliminary research and internal assessment focused on the nature and degree of any worker misclassification issues. Review applicable state and federal classification standards, conduct a company-wide worker classification audit and stay on top of relevant IRS notifications and employment law updates.
Of course, the best course of action, when hiring a new worker, is to classify them properly and place them on your payroll immediately, if they are employees.