Multiple Rates of Pay—Finally a Use for High School Math

A post from guest author, Vickie Lambert:

Under the FLSA it is required that employers pay employees overtime based upon the regular rate of pay. For this blog entry I want to look at one facet of calculating overtime and the regular rate of pay. What to do when an employee works at two or more different rates within the same workweek. In this type of situation, the regular rate of pay for the week is the weighted average of all the rates. Remember weighted average is not the same as average.

Let’s do an example: At Secrest Corp this week Paul worked to cover for other employees on vacation. His time card reads as follows:

Paul does not work in a state which requires daily overtime. So under the FLSA we would calculate his gross pay as follows:

Step 1… Calculate the Earnings for Each Day
Monday       8 x $8.00 = $64.00
Tuesday       8 x $8.00 = $64.00
Wednesday 8 x $9.00 = $72.00
Thursday     9 x $8.75 = $78.75
Friday         10 x $7.50 = $75.00
$353.75

Many times I have seen payroll professionals confuse weighted average with average. They add up the rates then divide by the number of rates. For example $41.25 (total of all the rates) divided by 5 (number of rates) = $8.25 and try to use that as the regular rate of pay. In this case it would be close enough. But unfortunately it doesn’t always work out so close and can end up underpaying the employee.

Step 2: Divide the total earnings by the total hours worked to determine the regular rate of pay
$353.75 divided by 43 = $8.23 (regular rate of pay)

Step 3: Determine the premium pay for overtime by multiplying the regular rate of pay by .5 (or divide by 2) then multiplying that amount by the number of overtime hours
$8.23 x .5 x 3 = $12.35

Step 4: Determine the total weekly compensation by adding the total earnings (step 1) and the premium pay (step 3)
$353.75 + $12.35 = $366.10 (total weekly compensation)

These 1938 rules under the FLSA require this method to properly pay employees working at more than one rate in a workweek. So you see, you should have paid closer attention to your teacher in high school math class.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Why Doesn’t the IRS Think Payroll Needs Affordable Tax Workshops?

Every year the IRS offers a series of Tax Forums across the country, usually in seven or eight cities from east to west coast. The Forums offer all kinds of workshops on all kinds of tax issues. It is geared primarily to CPAs and Enrolled Agents. But the cost is only $209 so even if there are only two or three workshops for payroll it is still a great deal. This is especially true if you are a CPP like me who needs to have these types of classes to renew.

For the past several years I have attended the Tax Forum here in Las Vegas with my CPA friend. I even wrote several articles touting how great they were for payroll professionals. Workshops I have attended included taxing nonresident aliens and filing W-2s electronically. After the first Forum I attended they asked for a survey of attendees as to what workshops they would like to see in the future. I, of course, jotted down some quick suggestions on adding Form 941, third party sick pay, and taxing fringe benefits in general. I submitted the survey and went merrily on my way, knowing I would see at least one or two of these courses next time around.

The next year came around but they did not have any new workshops for payroll people. In fact they had dropped a few from the time before. But still they had enough to get my money’s worth so I attended. And again they asked for ideas for workshops. Well this time I got a large cup of Starbuck’s coffee, a muffin and a pen and off I went. War and Peace it wasn’t but it was nearly that large. I explained how they could attract payroll professionals thereby increasing attendance, and ensure better compliance by offering these workshops. And it’s not like CPAs don’t need the information, they do. I submitted my tome of a survey and headed off into the future secure in the knowledge that I would see these workshops this year. I mean the IRS would surely jump at the chance to educate those professionals who are responsible for collecting at
least half of the taxes in this country. Isn’t compliance in payroll one of the most important things to them? They have all these publications to tell us how to handle fringe benefits surely a workshop or two wouldn’t be out of line?

So as soon as I got the e-mail for the Tax Forum this year I opened it with great anticipation. Wondering how I was going to fit in all the payroll related workshops this year. You know where this is going of course. Not only did they ignore my suggestions for workshops related to payroll but actually dropped any workshops that would even matter to payroll professionals. They only ones they kept were the tired old ones they always offer. Those are the ones on how to submit W-2s electronically and matching names and numbers on the W-2 to the SSA’s data base. Those both are actually offered by the Social Security Administration so I can’t fault them for not adding any new ones.

So the question arises, why doesn’t the IRS want to offer affordable tax compliance workshops to payroll professionals at their Tax Forums? Are they worried that so many payroll professionals will show up there will not be enough room for the CPAs? I don’t think so! Do they not care about compliance when it comes to payroll? I doubt that. So why not use this opportunity to offer sessions for payroll professionals? It’s a question the IRS needs to address.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Self-Employed on Unemployment?

Q. I am a OTR driver and am the only person working for this company. Now he’s shutting down the company. He classified me as self employed. Can I draw unemployment? I do not have a home, but license is North Carolina. Employer was in Nebraska.

A. The arrangement between you and the company providing your work is very important to get right.  The key here is, how much financial and behavioral control over your work did the hiring entity have?  If he provided your truck and directed all of the shipments you hauled, you may have been an employee.  If you have your own truck and were allowed to contract with other companies, you may actually be independent.  How have you filed your tax return since working with this individual?  Did you use Schedule C, which is typical for self-employed individuals?  Were you provided a 1099 or W-2 at the end of previous years?

The biggest problem with mis-classification is when termination, layoff or work stoppage occurs.  Employers typically attempt to avoid the employee classification simply to save money on the Social Security/Medicare match, unemployment taxes and workmen’s compensation insurance.  If you were actually an employee, then you are due unemployment compensation.  If you were not, then you are not eligible to collect unemployment benefits.  It makes sense that as a self-employed individual, it is my responsibility to keep myself busy.  If I am not finding enough work and lose clients, it is my own responsibility to find more business. No unemployment benefits should be received.  In an employee/employer situation, it is the employer’s responsibility to pay into the unemployment system and thus provide benefits for those employees who are terminated.

The state where you were based is likely the state where you will need to attempt to collect unemployment.  That state will make the determination if you were truly an employee or not.  If it is determined that you were not, you are out of luck.  This may take some time to sort out unfortunately.  In the meantime, the best thing you can do is find another source or income instead of waiting around for an answer. You can read a more in depth article a few years back regarding this topic as well.

The IRS also has a very good publication regarding worker classification.  You can read it here.

—–
Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

HHS Wants Us Fit—IRS Wants the Tax

It’s been in the news a lot lately—how unfit Americans have become. The First Lady is advocating programs to fight childhood obesity while AARP started an online movement to get its members fit over this summer. Everyone is being asked to join in and help. But for employers and especially for payroll helping fight obesity is a two-edged sword. If the employer takes office space and puts in a gym on site for employees to use under IRS regulations it is tax free. According to Publication 15-B:

Athletic Facilities
You can exclude the value of an employee’s use of an on-premises gym or other athletic facility you operate from an employee’s wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee’s dependent child is a child or stepchild who is the employee’s dependent or who, if both parents are deceased, has not attained the age of 25.
On-premises facility. The athletic facility must be located on premises you own or lease. It does not have to be located on your business premises. However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort.

The added bonus of offering an on-site gym is the employee good will it creates. But for the employer to use valuable and sometimes nonexistent “extra” office space to put in a gym can cause a lot of “bad will” among workers who are crammed into cubicles. And let’s face it not too many companies have an extra 500 square feet just laying empty. Plus I really have to ask how many of us overweight and out of shape payroll professionals want to huff, puff, and sweat in front of our staff and fellow co-workers. I know I never did. Plus with no shower facilities it could make the small and cramped payroll office somewhat—shall we say, unpleasant. And if the employer does put in a shower, I really don’t want to strip and shower in front of my staff!

But the employer really wants to offer a healthier lifestyle to its employees. And they also want to help other local businesses by buying services. So they buy a gym membership for all their employees. It might be a one-off benefit or even part of a larger and more complex wellness program that includes quitting smoking and diet tips. Either way it doesn’t matter. If the employer buys the gym membership everyone is paying taxes on it. FIT, FICA, FUTA, SIT, SDI (where required), SUI, Local Taxes–all of them. In essence the employer is made to pay more simply because they don’t want a gym next to their conference room.

My point is if the government wants Americans to get fit why make it harder and more expensive to buy a gym membership rather than gym equipment. Why should employers and their employees have to pay more for basically the same thing? Putting in a gym or buying a membership should be the same thing if it is for the employee’s health and for the health of America.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Social Security Started Over

Q. I have a unique variation of your “Social Security Tax on Everything” post… My wife’s small company decided to change their paycheck provider in July. The provider “reset” all employees yearly total earnings to zero and are therefore collecting the Social security tax from scratch. The provider claims they have to do this by IRS law. My wife had already paid the maximum of $6621.60. Will we be able to get the overpayment for the rest of the year back on our taxes? The instructions for line 69 of 1040, and form 843, seem to indicate that if your employer overwitholds then you are ineligible for a refund. She has not changed employers, just paycheck providers.

A.  This is a very good question.  Unfortunately, there is not enough information to answer your question.  It sounds like this employer may have switched to a PEO also known as a Professional Employer Organization.  Sometimes these are referred to as Employee Leasing Companies.  When an employer joins a PEO, the employer of record changes from the employee perspective and all Social Security and unemployment taxes start over for each employee.  PEOs can be a big cost savings for an employer by allowing a bunch of smaller employers to pool together for health insurance purposes to become one big client.  In your case, it would restart SS withholding however because technically, there is a different employer.  If this is not the case, I have no idea why SS would have started over.  Simply switching payroll providers would not cause this problem because the employer would be the same.  The employer would also feed in all Year-To-Date information from the old payroll provider to keep this kind of problem from surfacing.

Your second comment however is incorrect.  You can still obtain a refund of excess Social Security withholding from a single employer.  However, you must first ask the employer to refund the tax.  This quote is taken directly from the instructions from IRS Form 843 which is needed to request this kind of repayment, “A refund of excess social security or railroad retirement (RRTA) tax withheld by any one employer, but only if the employer will not adjust the overcollection.”  Refunds are available if your employer simply will not work with you.

—–
Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

Social Security Tax on Everything?

Q.  I have a full-time and a part-time job with different companies.  My employers are both taking out Social Security tax.  Is this correct?

A. Good Question! There are several common misconceptions about Social Security withholding from a paycheck. This is probably one of the biggest. The answer is….a resounding YES!!! Each employer of record is required to withholding 6.2% of your taxable wage for Social Security purposes up to the annual limit.  That is $106,800 for 2010. Even if you have 5 jobs at once, each employer is required to withhold this amount. Even if you are retired and collecting Social Security and have a job somewhere just for fun, the employer is still required to withhold Social Security tax.

You may ask, “What happens if the income from all my jobs add up to more than that limit?  Can I get all my employers to stop withholding Social Security?”  The answer is no.  You do have the ability to get a refund on your tax return if the total Social Security tax paid during the year was more than the maximum required.  That is $6621.60 for 2010.  You’ll see this on line 69 of the 1040 form.  The biggest drawback to this is that the multiple employers are not permitted to recover the overpaid Social Security.  They will match 6.2% up to the limit for everyone regardless whether that employee will be refunded overpaid tax later in the year.

Why Isn’t Payroll Considered Professional by Other than Payroll

My blog submission this month is not about payroll itself but rather the view that other professions, careers, occupations or basically anyone other than a payroll professional has of our chosen career field. I know that you have encountered the same reactions to being a payroll professional that I have. It can range from “what will you do when you finally decide on a career?” to “that’s not a bad job at least you get to know what everyone makes” to the worst of all “payroll really isn’t a profession it’s just a job”. That last one gets me most of all. I am proud of what I do for a living and of the people I associate with and the job we do.

But why isn’t payroll considered a profession in our society?

Well let’s look first at the definition of profession. As described at dictionary.com a profession is:

1. A vocation requiring knowledge of some department of learning or science: the profession of teaching.
2. Any vocation or business.
3. The body of persons engaged in an occupation or calling: to be respected by the Medical profession.

So if you go by the literal definition of profession we qualify. We have knowledge of some department or science. We have to know the law, the tax code, and computer software. These are areas that are used by other occupations that are deemed to be professions. There is definitely a body of persons engaged in our occupation. For every company in the United States with employees there is a payroll person paying somebody somewhere. And we certainly are a vocation and there is definitely big business wrapped up in payroll. Just check out the bottom lines of the major payroll processors, not to mention the fact that over 30 IRS publications or forms are created specifically for us.

So why then aren’t we given the respect we deserve as a profession? Last December I was involved in expert witness for a court case concerning payroll. I was asked to give my opinion about whether or not I thought a practice by the defendant was within the bounds of normal payroll procedures. When I gave my written report I used the word payroll industry rather than payroll profession because I know that society does not accept payroll as a profession. Well the attorney taking my deposition for the defense jumped on that one. He asked “Don’t you consider payroll a profession?” in a smug tone. And I got on my soap box. Yes I do, I stated forcefully but the rest of the professional world such as lawyers, CPAs and medical personnel do not. He had to agree that it is definitely viewed that way. And again I ask why?

When I first started in payroll back in 1977 personnel (as it was called in the old days) and payroll were pretty much equal. We both were paper pushers and clerks. But 12 years later, in 1989 I received my BBA in Personnel Management because there was no academic degree for payroll only personnel. And in the 20 years hence, Human Resources has soared into a profession with Masters degrees and maybe even doctorates at some universities. But yet there is still not one course of training at the college level that I am aware of for payroll other than the odd payroll accounting course or labor studies. But you certainly can’t get a full BA in it. Again I have to ask why?

I guess for one answer to my question maybe I have to quote Shakespeare in the play Julius Caesar, “The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.” Did we spend so much time doing payroll that we didn’t push payroll? That is certainly a question to ponder.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Hey Senator! Stop Taxing My Company Cell Phone!

There are a lot of fringe benefits making the news these days. But none with as much confusion as cell phones and the taxation thereof. If you follow IRS regulations closely you know there is an entity known as the property list. Items on this list are subject to taxation if used by employees for personal use. For example, company cars are on the list. And so are cell phones. They came on the list when they were first introduced way back when they were big clunky things with battery packs. Over time they have gotten smaller, smarter and cheaper. But they are still on the property list. Therefore even though they are common place at work and every second employee gets one, the personal use is still taxable wages to the employee.

Now the reason why I say they are in the news is because last year the IRS was asked to come up with a way to make the taxation easier to track and maintain. At that time the only way to do it is to take each cell phone bill for each phone for each employee and total up the personal calls. This could require an army of accounts payable clerks, so companies weren’t doing it. So the IRS came up with three ways to account for the usage without having to actually review each bill. Unfortunately CNN and the other news outlets got a hold of the IRS Notice announcing the new methods and asking for comments as they are required to do. Next thing you know CNN and the Wall Street Journal are announcing that cell phone are NOW taxable! Well the blogosphere went nuts with everyone up in arms and attacking the IRS for daring to tax our cell phones. They called for the IRS to cease this taxation attempt immediately. But what was not explained was the property list and how the IRS has no control over what goes on it. It is totally controlled by Congress.

In reaction to this uproar a new bill has been debated and passed in the House. H.R. 4994, the Taxpayer Assistance Act of 2010. Introduced by Rep. John Lewis, this bill calls for cell phones to be taken off the property list immediately. It has been sent to the Senate and is currently in the Committee on Finance. But this is not the first time that the House has attempted to take cell phones off the property list. And it always dies in the Senate. So if you care about having to tax cell phones or having your company cell phone taxed, now is the time to act. You need to write or call your senator and let them know you want this passed in the Senate and made law.

Vicki M. Lambert, CPP

www.thepayrolladvisor.com

Arizona’s New Withholding

Arizona has done it again.  Currently, anyone who is being paid in Arizona must select from several percentages on the A-4.  Arizona withholding is based on a percentage of federal withholding.  The percentage you pick will be multiplied times the federal withholding number on your paycheck to arrive at Arizona withholding.  If you selected 24.5%, and your federal withholding was $112, then your Arizona withholding would be .245×112 or $27.44.

This created a problem with all the federal withholding changes that have happened over the last 10 years.  Each time there was a withholding decrease, Arizona’s revenue decreased as well.  The Making Work Pay Credit last year decreased checks for everyone and was the last straw in the problem.  Arizona’s legislature had to increase the percentages on this form each time the federal government decreased withholding  just to keep withholding even. Finally, last year, the legislature directed the AZ Department of Revenue to develop a new withholding system to be put into place by July 1, 2010.

There are other glaring problems with this method.  Arizona’s tax rates are based on a formula.  By requiring employees to pick a flat percentage, they are forced to determine a marginal (or average) tax rate for their tax situation.  This can change based on events in a person’s life like marriage, divorce, new children, home purchase, a second job or a spouse begins working that didn’t before.  Any of these events change the marginal rate.  Most people never adjust their A-4.  This obviously causes frequent confusion.

Another problem is that many people simply have no federal tax liability.  With no federal withholding, there was no way to have any Arizona withholding and inevitably, these individuals would end up paying extra every year at tax time.

Yet another problem is those that move into the state mid-year.  As a Tax Preparing CPA, I found it very difficult to advise my clients when they move in mid- year which percentage to pick.  The problem still exists in the second year (first full year of residence) since they have no history to draw from in selecting their percentage.

So…..Arizona’s new method was recently announced and here is the form.  All employees must complete a new one of these by July 1, 2010.  Guess what? They solved none of the above mentioned problems and even made some new problems.  Now, the percentage you select is percent of gross pay.  This decouples the state from federal withholding changes but still does not give employees who are new a clue to which rate to select.  Now instead of new employees only being confused, any person working in the state gets to be confused and not just for half a year, but for next year as well.  There is still no basis in the actual tax rates with these percentages.

Instead of providing some rates that anyone can pick, there are still three lines for employees to select based on income level.  This should have been removed.  If you have very low tax liability but a higher than $15,000 income, you cannot select the lowest rate.  On the back of the new form, there is a worksheet provided.  Notice in line 10 of the worksheet that there is no provision in the instructions for selecting anything other than line 1 (front side) percentages.  What if the calculation result is lower than the percentages on the form?

Employees are not able to determine their “target” withholding without digging into last year’s tax return or contacting their tax preparer.  Again, changes in taxable life events make last year’s number irrelevant.  What are you supposed to choose? This value is difficult for those without a tax background to understand.

Supposedly, payroll “experts” were used to help develop this form.  Unfortunately, they chose to tweak the existing system enough to only make things more confusing.   I hope that the state will make some wholesale changes to this form to more closely match what other states are doing and what the Arizona tax system actually looks like.  It’s not bad to use withholding allowances and marital status.  We are forced to use that on the tax form.   Let’s get this right next time.

First-Time Employer, What Do I Do?

Q. I have a pretty new business in Arizona and will soon be hiring my first employees for a big job.  They will be temporary only.  What do I do?  Should I just call them contractors and give them a 1099?

A. Good question and probably one  of the most frequent questions from new employers.  You need to determine the level of control you will have over the workers to decide if these are contractors or really employees.  In most cases, you have employees.

Some of the items to keep in mind when hiring your first employees.

• You will need a federal Employer ID Number if you don’t already have one. You can apply for this online.
• You will need a withholding/unemployment account set up with the state. In Arizona, that happens here. Click on License a New Business and complete the application. This needs to be done soon but not necessarily before the job.
• Submit a new hire report to the state.  This helps the state locate the individual if they owe child support, www.az-newhire.com
• Run e-verify using I-9 data to ensure verify they are eligible to work in the US. Click E-verify enrollment under Tools on the right side. You do need to register before using this service.
• Each new employee needs to complete a form W-4 (federal withholding)
• (In Arizona) Each new employee needs to complete a form A-4 (Arizona withholding). Many states have an equivalent withholding form.
• I-9 (verification of right to work)
• Get Publication 15 from IRS.  This well-written document gives employers the instructions to properly handle withholding and employees.

There are many labor laws that apply as well depending on your number of employees.  To find answers to questions surrounding overtime and other labor laws, you have two options.

1. The Department of Labor website, http://www.dol.gov
2. Your state Labor Department website.  There is a list of those here.

This is a lot of information to absorb for a small business owner.  One other option you may wish to pursue is to contact a local CPA or payroll firm to help you stay compliant.  Your specialty is the industry that you are in, not running payroll.  Connecting with someone who already knows how to do this via outsourcing can make your task much easier.