Mistakes are going to happen. The

question is who would you rather trust

to have your back when they do?

‐ Al Wagner, CEO & Founder

MISTAKES can cost an entrepreneurial business

$1,000’s each year

      

Cutting Through the Fat Chapter 8 – Common Payroll Mistakes

I’ll start this chapter out by sharing my own little story. While in the process of writing this book and in fact this very chapter, I received a phone call from the Florida Department of Revenue asking me when I was going to make payment on an outstanding unemployment tax balance. Of course I asked the question, “What balance?”. The agent proceeded to explain that I had a balance from last year’s second quarter AND I’d be re-rated to the highest rate possible for my failure to pay the balance!!! Well, I was shocked. After some additional investigation, we discovered that the address they had for my office was more than two years old! I re-located the corporate office and the 2013 rate notice never made it to me. My company’s rate was bumped up slightly and it created a balance since I had used the wrong rate for the 1st and 2nd quarters. Since they had the wrong address, I didn’t receive any of the follow up notices. Now, mind you, I had completed each quarters return with the proper corporate address. I had filed every form with the proper corporate address. I just had not completed a change of address form for the unemployment division within the Department of Revenue. The subsequent domino effect resulted in penalties and interest added on to the outstanding balance and a tax rate more than twice what it should be. At the writing of this book, I have filed an appeal for an abatement of penalties and interest as well as a rate reduction. Your guess will be as good as mine regarding the outcome. Lessons learned. Don’t make the mistakes in this Chapter!

There isn’t a clear consensus across the service industry as to what mistakes are the worst or the most costly. Each mistake should be evaluated on its own merits and may or may not cost you significant dollars and ultimately lead to an IRS audit or State Agency audit, or worse – both. Make no mistake about the effectiveness of the communication between both Federal and State agencies. As computer software becomes more and more sophisticated and intelligent, the more automated comparison between Agencies becomes. This type of comparison happens with income tax filings as well as payroll filings. Mistakes get made by the Agencies of course and your record keeping becomes critical.

 

 

Not thinking about getting tax

payments in on time is a huge relief.

TruPayroll handles it all for me.

‐ Bruce Hayne, Owner Hoot’s Breakfast & Lunch

The Average IRS Penalty For A Mistake In A Tax Deposit is $1,594

Therefore, I have compiled a list of commonly made and often times costly payroll mistakes. I’ve created this list from TruPayroll’s experience as well as that of many other professionals. I’ve not “ranked” these issues in any particular order. However, I have listed the mistakes with those more commonly agreed upon as the more common to the least common. Review each mistake and oversight with keen interest. I assure you the IRS and your State Department of Revenue will prosecute any and all of these mistakes with extreme prejudice. 1. Missing tax payment and/or tax form filing deadlines: Missing tax payments will generally always cost you money. A missed payment will

generate penalties and interest from the IRS. Once in a while, the IRS is benevolent and will abate a late payment penalty when a taxpayer writes a written request. However, those moments are far and few between. State agencies can be more forgiving and some can be downright nasty. Sometimes it depends on the agent you speak with, too. The best policy is to simply make all tax payments and all tax form filings on time. You will avoid a litany of potential headaches and save time, energy and money. Quality payroll companies generally make some form of guarantee for tax payment calculations and/or timely filing. You can bet your payroll company doesn’t want to pay penalties for you, so payments are made timely. Conversely, if you aren’t using a payroll company, implement a reminder system to insure you never miss filing a form or making a payment.

 

 

We know our rate is high and it’s because

we lay off everyone and close down for a

month each year.

‐ Requested Anonymity Restaurant Owner

Unemployment/Re-Employment Rates are recalculated each year

based on claims filed

2. Not using your payroll processing system: Whether you use a payroll processing company or an internal

system, the system is responsible for maintaining accurate records for all your filings and tax payments. If a “manual” check is issued to an employee and NOT recorded in whatever payroll system is being utilized, the company’s wages will be underreported and therefore so will the required taxes. The obvious result is receiving correspondence from one or more tax agencies wondering why your records don’t match. Worst case scenario is you do all the right calculations for taxes, issue your employee a net check, and totally forget to include the payment in your employee’s wage history. Now, not only do you have underreported wages and company taxes, you’ve withheld taxes from your employee which means you’ve got someone else’s money. The potential fiduciary penalties for this situation can be devastating.

3. Using an incorrect State Unemployment/Re-Employment rate: This common mistake results from your particular State changing the effective rate of

your unemployment/re-employment rate. These rates are generally calculated as an initial starting rate which is either increased or decreased based on the volume of ex-employee claims are filed. A rate decrease is general not an issue because it results in overpayments which can be applied to future obligations or refunded. The bad news comes when your rate is increased. States like Florida issue annual rate notices and mail the notice in December. Depending upon your claim history, should you rate increase and you fail to inform your payroll company or modify your internal system, the result will be an underpayment of tax. This will generally cost you interest and penalty dollars, too. Be sure to open all letters from your taxing agencies and modify rates as necessary.

 

 

We had no idea our employees were

actually employees until a payroll

specialist from TruPayroll pointed it out.

‐ Peter Galluzzo, Owner Jump Hair and Nail Salon

Misclassification of Employees as Contractors has as many as 10

penalties, 2 of which are criminal!

4. Poor Record Keeping and Maintaining Records:

There are several reasons to adopt a comprehensive system for maintaining and gather employee records. There are many potential agency that may want to see just how you handle your employees ranging from the obvious, the IRS to the more oblique such as Department of Labor. Specifically for restaurants, tipped employee records you must keep include and are not limited to: food served gross income, declared tips, hours worked, identity documents (ie SS card, Driver’s licenses, I-9), etc. The length of record retention varies across agencies so your best bet is to use the lowest common denominator which is the longest of 7 years, (IRS). Even then, you might consider using a scanning/digitizing system to maintain all your records electronically (be sure to have at least one off site backup).

5. Misclassification of Employees v Contractors:

This is a very serious common mistake. Determining whether an individual is an employee or an independent contractor can be difficult. You should side with caution and decide in the most conservative manner possible. The penalties and interest that could accrue to you and your business for a misclassification of an individual as an independent contractor when that individual is really your employee can be huge. How huge? Internal Revenue Code §3509 allows for an increase in interest and penalty rates of 100% from 1.5% to 3% and 20% to 40%, respectively. Furthermore, if you do misclassify an employee as a contractor, you are NOT allowed to recover the employee’s portion of the tax from the employee! You get the joy and thrill of paying it all.

Before making any final decisions on employee or contractor, please visit http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee.

 

 

Our competition uses misclassification of

employees as contractors to evade

overtime.

‐ Mike, Owner & Licensed Finish Carpenter

The US Dept of Labor estimates the average employee works 3.5 hours

of overtime per month

6. Issuing Form 1099-Misc:

The common mistake here is NOT issuing the required form to contractors. While this isn’t directly a payroll issue, this is close enough. If you hire independent contractors, any contractor you pay $600 or more in a calendar year should generally receive Form 1099-Misc from you by January 31 of the following year while you have until the end of February to send in the IRS copy. Penalties for making mistakes or not filing the form range from $30-$100 per form with maximum penalties ranging from $250,000 up to $1,500,000. Yes, that’s into the millions. Don’t think the IRS isn’t serious about this issue. Enforcement action is increasing. Just get it right.

7. Overtime hours and pay rates:

There are several issues to consider with overtime. Is your employee truly an exempt employee? What rules does your State impose for the calculation of overtime hours? Are employees working overtime after 40 hours per week or 80 hours every two weeks? Is your business in a State with lower minimum wage for servers and therefore overtime rates are calculated differently? My company is located in Southwest Florida, Collier County to be more specific. There is a regional law firm regularly advertising its legal services to employees who are being misclassified as exempt as well as those employees just not receiving overtime pay. I suspect you have such law firms in your area as well. Employment law is a real specialty for lawyers, and overtime oversights will cost you in multiple ways. You could be subject to fair labor law fines as well as tax penalties, legal fees, etc etc. As a fellow entrepreneur and business owner, payroll is an easy expense to be tempted to do “off the books” and “under the table”. Better to simply follow the rules and pay your employees according to the right overtime rules than take the risk of being fined, audited and/or sued.

 

 

We’ve had several employees with child

support orders and/or IRS tax levies.

TruPayroll has made this easy for us.

‐ Kari, Restaurant Manager

In Most States, Employers Can Be Held Liable for an Employee’s

Garnishment if Not Processed By the Employer

8. Wage Garnishments and Levies:

Amounts owed to third parties such as the IRS and child support must be withheld by employers when notified such an obligation exists. There are specific rules which may vary from State to State on how, when, where, and why garnishments and levies are paid and in which order. Whats the risk of making a mistake here? If you hand over money to an employee that should have been withheld, you may be held liable for any amount you could have withheld and did not.

9. Annual Form W-2:

The most common mistake made when filing W-2 forms is the mismatching of an employee’s social security number with their name. In my experience this generally occurs as a result two reasons: 1. The employee is not legally in the US and has presented a forged social security card; 2. The employee’s actual ssn has been transposed or otherwise entered wrong on one or more forms. What’s the end result of a mismatch? You may be subject to withhold additional amounts from employees and not doing so when required can be costly. Other mistakes result from failure to include all wages and other benefits in the appropriate boxes on the W-2. Any time you fail to properly report information may subject you to penalties and interest.

10. Fair Market Value of Gifts:

Rewarding your employees is always a great idea. Such acts often create higher moral and longer employee retention. Including those gifts within taxable wages is almost always required. There are occasions where that might not apply, however, in general, gifts, especially gift cards (itunes, etc), are INCLUDABLE in your employee’s wages and subject to employment taxes. Of course, failing to include them means what? You guessed it by this time, penalties and interest for underreporting.

 

 

Our guys run to the hardware store from

the job site constantly. If they want to be

reimbursed, you bet I want a receipt.

Then, I just put that through TruPayroll.

‐ Dave, Managing Partner Surfacing Company

Be sure to maintain adequate accounting records so expense

reimbursements are includable in an employee’s gross wage

11. Expense Reimbursements

Please consult with your accounting/tax professional to insure you have an “accountable plan” for reimbursing employees for expenses. There are specific rules which must be met if you repay employees for their out of pocket expenses. When these rules aren’t met, the reimbursement is included in the employee’s gross wage. Typically, for restaurateurs this is giving money to reimburse an employee for running to the local grocery or convenience store when you run out of fresh produce or other supplies. I suggest the use of a petty cash fund which makes the need for an accountable plan unnecessary. Again, consult your tax professional for more specific advice.

12. Including Fringe Benefits in Wages

The most common fringe benefit I see is the use of a company vehicle for personal use. This is another situation where its advisable to seek the advice of your tax professional. Other fringe benefits include and aren’t limited to your business paying for your spouse or children to travel along with you to a food conference or other event. These payments might be includable in your gross wages. The average restaurant that’s not a chain, in other words, the local mom and pop eatery, won’t have many “fringes”; however, if you do, be sure to include them in your wages. And, to boot, the fringe is probably paid to the owner/operator versus a regular employee.

13. Backup Withholding

While not something I’ve personally seen in my 20 years of practice, the general industry has listed this as a concern. The issue surrounds the payment to a vendor before you obtain the requisite Form W-9. How do you avoid this? Simple collect a Form W-9 from each and every vendor you pay. Is it a pain? Yes. Does it simplify your life in the long haul? Absolutely.

 

 

TruPayroll gets us a wage poster every

year. It’s not something they normally

do, and they still help us out anyway.

‐ Bill Gepford, Treasurer Capri Christian Church

According to the Federal Labor Standards Act, every employer is to display the information found on a

“wage poster”

14. 3rd Party Sick Pay

Third party sick pay refers to your insurance carrier or other such coverage paying you and/or your employee for time on short/long term disability. These payments are includable in your employee’s W-2. While this is seen as an area of concern nationwide by tax professionals, my experience in the restaurant industry, (again mom and pops), leads me to believe that very few readers will ever have such coverage in place rather will rely on worker’s compensation for injury claims. Because my fellow professionals are seeing this, you should also be aware. Consult your tax and/or insurance professional for more information about your specific situation.

15. Confidentiality of Employee Information

Maintain strict confidentiality of your employee’s information can prevent a magnitude of issues from arising. Allowing an ease of access to employee’s pay rates, bonus, etc may lead to unhappy and jealous employees which of course leads to all manner of problems. Not protecting social security numbers, addresses, dependents, etc, may lead to issues of identity theft and other frauds. Your best practice is maintain strict access to your employees personal information.

16. Wage Posters

We all get these reminders in the mail and/or emails about buying employment posters. The US Department of Labor mandates the display of certain information usually included in the posters these purveyors solicit. Either type it up yourself or buy a printed poster to display in accordance with the FLSA. You guessed it again. Penalties may be imposed against you for your failure to display the information!

 

 

Ignorance is bliss, or so the saying goes.

When it comes to payroll issues, be

informed and hire solid professionals

‐ Al Wagner, CPA CEO & Founder, TruPayroll

Regardless of your personal level of knowledge or experience, You, the

owner, are always responsible

17. Relying on software or processing companies

Whether you do your own payroll processing or hire a company, relying on computerized software for all your payroll requirements can lead to disaster. Ultimately, you are responsible for reporting your information accurately. While software and out sourced providers calculate millions of transactions each year, its only as good as the data that’s entered. If there are changes or mistakes in the entry, the output will be wrong. Once again, you might find yourself the subject of an audit and in the worst case, owe fines, peanlties and interest due to the mistake.

18. Ignorance

This is the most costly of all payroll mistakes. Just because you may not understand nor believe all the various rules and regulations apply to your restaurant, doesn’t make it so. Claiming ignorance of the law will not get you a proverbial “get out of jail free” card. While some payroll companies will offer guarantees, be sure you understand the nature of the guarantee or you’ll be paying for the misunderstanding. Consult your tax and/or legal professional to insure you are complying with the multitude of laws and regulations that pertain to you and your business.

 

 

Our customers are our family. We joke,

we laugh, we brainstorm, we kick it

around, and we get it done

‐ Al Wagner, CPA CEO & Founder, TruPayroll

TruPayroll services all 50 states with a local business attitude.

As a side dish, here are two other issues that aren’t so much mistakes are they are general concerns. 1. Forgetting bank and federal holidays:

While this is a common mistake, the results are generally only internal strife with your employees. By forgetting bank and federal holidays, you’ll miss processing deadlines for direct deposits thereby delaying when your employees receive their paychecks. Use the reminder system we discussed earlier to insure you enter and process your payroll a day or two earlier than normal around these holidays. Maintain a happy workforce.

2. S-Corp Officer/Owner Compensation: In recent years, the IRS has stepped up its audits of small business, specifically S-Corporations, verifying that shareholder/owner/officers are being paid some amount of payroll. The simple test that the IRS performs is this: What would your business need to pay someone to do YOUR job. Many, many times I have seen a small business owner, definitely restaurateurs, take money from their business in the “form” of a distribution of income. While there are certainly provisions in tax law allowing the practice, you must also consider paying yourself a “reasonable” wage. Do yourself a favor and consult with your tax professional to determine just how much you should pay yourself in a wage to prevent the IRS from knocking on your door.