A company’s largest asset is generally the people who work for it and as such, payroll is often its greatest expense. Payroll must be done timely and accurately to avoid penalties and worker dissatisfaction. However, payroll processing is complex, involving more than 100 U.S. Department of Labor regulations and several evolving state and federal tax rules.
“It’s very complicated,” said Bill Rosado, founder and owner of Managed Pay, a Las Vegas-based professional employer organization (PEO) that provides payroll and professional employer services.
It is always advantageous to business owners and executives to know about existing issues, recent legislation, common mistakes and current trends pertaining to payroll practices. Exploring them seems appropriate in light of the National Payroll Week (September 1st through the 5th).
Payroll Components
Typically, payroll encompasses calculating and deducting required withholdings, paying workers, depositing taxes, filing the associated returns and, at year end, issuing W-2 and possibly 1099-MISC forms, according to Rosado.
“The minute that you become a little more sophisticated as an employer and start offering benefits, you have additional requirements,” he added.
Mandatory withholdings for Nevada employees are:
• Federal Income Tax (FIT)
• Federal Insurance Contributions Act (FICA)—Social Security, Medicare taxes
• Federal Unemployment Tax (FUTA)
By law, employers must compensate employees at least bimonthly, match each employee’s FICA withholding and pay Nevada Modified Business Tax and Workers Compensation premiums.
The various taxes must be deposited and their corresponding forms filed on time. Yet, the due dates vary. For example, 941 tax (FIT and FICA) is due either a month, a half week or a day after employees are paid, and the 941 form is filed quarterly. The 940 tax (FUTA) is due quarterly, with its form filed at year’s end.
Penalties and interest accrue for every day taxes are late. The penalty is 2 percent for taxes paid five days late, 5 percent if 6 to 15 days late, and 10 percent if more than 15 days late. Employers are always ultimately responsible.
“It can be really expensive,” said Kimberly Gyuran, president of Las Vegas’ The Payroll Co., a payroll and human resources management firm.
Employers must follow court-ordered garnishments, such as child support and bad debt, as well as levies, like Internal Revenue Service debt. They must deduct the instructed amount from the employee’s pay and send a payment check to the garnishing party. If they don’t, they can be held wholly liable for the employee’s debt and possibly incur additional fines and legal action, Gyuran said.
The offering of any pre- and post-tax benefits to their employees, moving expenses, car allowances, health, dental or vision insurance, flex spending, traditional and Roth IRAs, 401(k)s, and cafeteria plans means additional payroll work, as each has different state and federal tax requirements.
Companies meeting a minimum number of tip-generating employees must perform regular tip allocations, Rosado said. This involves calculating, per employee, 8 percent of their total sales during the given period. If the employee has not claimed at least that figure in tips, the employer allocates the difference, tips claimed minus the 8 percent amount, to the employee, who then must pay taxes on it.
Recent Legislation
New laws concerning payroll have become effective in recent months. “It’s a never-ending stream of changes,” said Howard Winters, founder and chief executive officer of the Las Vegas-headquartered Payroll Solutions Group, which offers PEO services. “After an election is when there is a flurry of legislative activity, so change is imminent.”
State and federal minimum wage requirements increased in July. Nevada’s increased to $5.85 an hour or $6.85 an hour, depending on whether or not the employer provides health insurance, from $5.30 or $6.33 an hour. This law also provides for when a company pays an employee less than one-and-a-half times the minimum wage ($10.28/hour) and the employee works more than eight hours in a day, the employee is eligible for overtime pay for the additional time worked. Also, employers must guarantee salespeople the minimum wage rate. Federal minimum wage increased to $6.55 from $5.85 an hour.
Also in July, Nevada began requiring companies paying $300,000 or more in quarterly unemployment taxes, usually companies with 50 or more employees, to do so electronically.
Mileage reimbursement rates have risen to 58.5 cents from 50.5 cents and are effective through December 31.
New legislation is always under consideration. For example, in June the U.S. House of Representatives passed a bill (H.R. 6049) that contains a fringe benefit provision for bicycle commuters.
Securing Sensitive Information
Access to and the use of stolen Social Security numbers affects payroll and reinforces the need for securing private information. “Personal information oftentimes is obtained through payroll documents or processing,” Gyuran said. Consequently, I-9, or Employment Eligibility Verification forms, which contain employees’ Social Security numbers, should be stored separately from W-4 forms and employment applications.
“A lot of people don’t do it because of the new hire reporting that’s required now,” Gyuran said. “There are no internal controls. Too many individuals are allowed administrative access to payroll information.”
Employers are required to verify two valid identifications for a new employee, as well as fill out and sign an I-9, or Employment Eligibility Verification form, declaring they have examined the documents and find they “appear true and valid.” This is to ensure employees have a legal right to work. Employers also must report to the state any new hires, which helps it track people owing child support.
Another situation that can arise is if two individuals use the same Social Security number in their respective workplaces, one legitimately and the other fraudulently, the fraudulent person’s wages get reported to the government on the other person. This creates problems for the identity theft victim. In addition, payroll taxes are filed for two people on the one Social Security number, but only one individual files a personal tax return.
Arizona enacted a law last year requiring employers to e-verify all new employee hires. This means they have to run any new hire’s Social Security number through the Social Security Administration database to see whether it matches the worker or not. If it does not, the employer must address the situation immediately. The law contains stringent requirements and has associated penalties.
“Nevada is not there yet, but it’s not far behind,” Rosado said.
Employer Mistakes
“Employers oftentimes don’t understand payroll complexities,” Gyuran said. This can lead to improper withholdings calculations, late payments and not knowing when, how and whether to pay workers overtime.
Employers also get into trouble when classifying employees as exempt or non-exempt from overtime pay under the Fair Labor Standards Act (FLSA). Those entitled to overtime are considered non-exempt. Certain workers’, however, are exempt. Generally, they include bona fide professionals, such as doctors and teachers whose jobs are governed by another federal labor law.
“The biggest trap for employers is thinking that they can just put somebody on salary and avoid paying overtime,” said William Bryson, an attorney, with the Nevada firm Kummer Kaempfer Bonner Renshaw & Ferrario, who specializes in labor and employment litigation.
Penalties for failing to pay overtime range from 2 to 100 percent. In addition, employers must pay back overtime per occurrence and, if an employee prevails in a related lawsuit, all attorneys fees.
Similarly, employers sometimes mistakenly or purposefully determine a worker is an independent contractor when they are really an employee. The IRS offers guidelines for determining this and the option of filling out and submitting an SS-8, or Determination of Worker Status form for an IRS opinion. “Most of the time if there’s a question of whether or not somebody is actually an employee, they usually are,” Bryson said.
The IRS randomly conducts audits on and enforces proper worker classification. The potential ramifications of a wrong determination include disgruntled workers, paying out-of-pocket for a worker’s injuries, paying back taxes on all wrongly classified workers and a penalty of between 1.5 to 40 percent of wages paid.
“Remember 25 years ago when the tax man would knock at your door? It’s happening again,” Gyuran said. “The federal government is very strict. They want their money.”
It is common for companies doing their payroll in-house to not have checks and balances in place to ensure and audit payroll accuracy.
“You really need to have an inspection process or a way to validate that you’re doing things properly,” Winters said.
Not keeping any or all of the appropriate payroll records is another pitfall. Employers must keep comprehensive payroll records for at least three years, under the FLSA. Failure to do so can command a fine up to $10,000 and a jail sentence up to six months.
“People are always trying to shortcut things, but they need to ask: Will it cost more in the long run?” Gyuran said.
Trends
More and more aspects of payroll are being handled electronically. Methods include direct paycheck deposit, debit cards, payroll cards that work like credit cards and electronic funds transfers.
Some companies, payroll and non-payroll, use Web-based information systems to allow employees access, with a secure password, to their individual payroll records including pay stubs, an earnings record and in some cases, employer information, such as the company manual or health insurance plan overview.
Payroll Solutions Group uses the HR Pyramid system. “All of the data and employer records are available to the client via Web interface,” Winters added. “Literally anything that an employee might want to access we can digitize and make available through self-service.”
Outsourcing is another option for companies. Advantages of outsourcing payroll include confidentiality, convenience, tax accuracy, low fixed costs, time savings and up-to-date experts. Disadvantages include the cost, lack of control over the processes and security.
“Any small business person will tell you payroll is a big headache when you try to do it in-house,” Bryson said. “It’s almost a no-brainer for them to have a payroll company handle it for them.”
If you use a payroll firm, monitor them. Review reports. Have tax documents sent to you. Call the IRS quarterly to ensure your taxes were deposited. “Randomly inspect what you expect,” Gyuran said.
The payroll industry has evolved to offer more than simply payroll services. A new trend is business process outsourcing (BPO), companies sending their administrative work, particularly related to human resources, to outside firms.
“BPO is going to start expanding,” Gyuran said. “Businesses get some of the administrative work out of their offices and don’t have to pay an average of 20 percent in taxes for an employee to do it.”
Similarly, more companies are outsourcing to professional employer organizations (PEOs), which provide payroll, workers compensation, human resources and employee benefits administration. However, unlike a BPO, PEOs assume employer risks for their clients via co-employment. The PEO becomes the employer of record for tax and insurance purposes.
“This industry has evolved to where you can go from being the employer into a PEO relationship and not ever have to worry about or know these rules because the PEO handles it as a co-employer,” Rosado said.
Payroll can be handled in a variety of ways and depending upon the limitations of the company, there are always options for employers looking to successfully navigate evolving legislation as well as secure themselves against mistakes.
