Chris Hadden, CPP Technical Sales Manager How did you spend your New Year’s weekend? I spent mine reviewing my family’s spending in 2015 and began preparing my budget for 2016. While this may sound a bit sad (my wife certainly thought it was), I actually quite enjoyed it. Don’t get me wrong, I did plenty of other possibly more enjoyable things over the weekend as well, but getting my spending plan in order for 2016 allowed me to enjoy my other activities because I knew I had already done my homework for this year. So what in the world does this have to do with Payroll? Sure, it’s probably not a bad idea to think about your spending in 2016, but that’s not really my point. It is more pertinent to stress the importance of getting everything in order for the year. Making small adjustments today will be much easier than making huge adjustments later in the year. So now that the New Year is upon us, what can we do today to be better prepared for 2016 payroll? 1. Do not misclassify workers. An employee should be treated like an employee, and a contractor should be treated like a contractor. Easy enough, right? Not always. Let’s say I hire someone to come in and remodel my office building. They are paid a flat fee when the job is completed, they provide their own tools and materials, and they choose their own hours. If you said they would be a contractor, that’s correct. This is an outside contractor that you would not be withholding taxes on, and a 1099 form would be issued to them at the end of the year. Now let’s say I hire someone to update all of my company marketing. They are paid a flat hourly rate, provide their own computer, however, I control the hours they can work every day. These are situations where it gets a bit trickier. Understanding when to treat someone as an employee versus a contractor is critical for every business and payroll professional. Here are the Common Law Rules: Facts that provide evidence of the degree of control and independence fall into three categories: Behavioral: Does the company control, or have the right to control, what the worker does and how the worker does his or her job? Financial: Are the business aspects of the worker’s job controlled by the payer? These include things like how a worker is paid, whether expenses are reimbursed, and who provides tools/supplies, etc. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue? Is the work performed a key aspect of the business? Form SS-8 If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status. So why should you care? If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, would not apply). Relief Provisions If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods after 1977. 2. Correct State Unemployment rates and employee share. Have you received your 2016 SUTA rates yet? Most states update these on an annual basis, and these rates vary by employer. Because this rate varies by employer, most payroll systems do not include any SUTA rate adjustments in their annual tax changes. So, it’s up to you to ensure these adjustments are entered into your payroll system. Must employees pay too? Keep in mind, employees working in Pennsylvania, Alaska or New Jersey have an employee share which employers are obligated to withhold from employee paychecks. Ensure you are withholding these now, to avoid asking your employee’s to pay up a lump sum at year-end. Pennsylvania — the 2016 rate is 0.07% of all wages paid Alaska – the 2016 rate is 0.50% New Jersey – the 2016 rate is 0.505% 3. Keep adequate payroll records. How long are you currently keeping your payroll records? Now that we are in 2016, are you planning to throw out your 2015 or maybe 2014 records? You may want to think twice before doing that. You are required to maintain payroll records and have them available for IRS inspection. These include timesheets, expense accounts, copies of W-2s, and other payroll records. Usually, you should keep information for at least four years. Also, don’t forget about the employee I-9 Forms, which shows an employee’s eligibility to work in the United States. There are multiple agencies with record-keeping requirements, including: Fair Labor Standard Act Records must be kept for each employee for at least three years after their last date of entry This includes, but is not limited to, employee name, address, date of birth (if under 19), hours worked, overtime earnings, total wages, and date of payment including pay period covered Internal Revenue Service Records must be kept for at least four years after the due date of the tax for the return period to which the records relate. This includes, but is not limited to employee name, address, compensation subject to taxes, Form W-4, fringe benefits provided, copies of all filed returns, tips reported Many additional records requirements (some with record requirements of up to seven years ): Federal Anti-Discrimination Laws Civil Rights Act of 1964 (Title VII) Age Discrimination in Employment Act of 1967 (ADEA) Government Contractor Regulations Immigration Reform and Control Act (IRCA) Family and Medical Leave Act (FMLA) State Unemployment Insurance Laws State Wage-Hour Laws Unclaimed Wages What’s the cost of non-compliance? Willful violation of the recordkeeping requirements can bring a criminal penalty of up to $10,000 and/or imprisonment for up to 6 months. In addition to this, there are additional hidden costs, such as an employee (or group of employees) filing suit claiming an employer failed to pay the required minimum wage and/or overtime pay. Without proper records to back the employer, the court will likely back the employee’s (or group of employees’) claim. 4. Local taxes. Federal taxes, check. State taxes, check. Is that it? No . Don’t forget those local taxes as well. Many states currently have additional taxes in which the employer should be withholding from employee’s pay, beyond the Federal and State taxes, which is reported on the employee W-2 form at year-end. To make matters, even more, complicated, some states, such as Pennsylvania, make compliance even tougher on employers by having the employee’s work location and home address used in determining which local tax jurisdiction should apply. Also, because these tax rates typically vary by locality, it’s critical that employers stay on top of this. Here is a list of states which currently have local taxes: Alabama California Colorado Delaware Indiana Iowa Kansas Kentucky Maryland Michigan Missouri New Jersey New York Ohio Oregon Pennsylvania West Virginia 5. Do not pay creditors before paying the IRS. Even as the economy continues to improve, small businesses may find themselves in a position where they are short on cash at times. When the landlord is knocking on your door, or the lights are on the verge of being turned off, you might consider holding off on handing over cash to the IRS after processing payroll. While this may be tempting, this should never be done. As a business and an employer, you are a “responsible person” who remains 100% personally liable for “trust fund” taxes (amounts withheld from employees’ wages). This is true, even if your business is incorporated or is a limited liability company. What’s the other option? Set aside cash to cover payroll taxes so you won’t use these funds for any other purpose. We want everyone to have a smooth transition into the New Year, and to be prepared for 2016. Let’s all take a few minutes today, to ensure tomorrow is a win. Here’s to another great year!
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