Did You Tell Your Payroll Department?

This week’s post was inspired by my attendance at the American Payroll Association‘s 29th Annual Congress.  This is the biggest gathering of payroll professionals and vendors anywhere in the world.  The common theme I observed during workshops and networking opportunities was that employees just don’t communicate changes to their payroll system well enough.  Many presenters and attendees experienced the problem of  a significant payroll event that was never given to them for processing.  The demand was that the payroll department “just fix it.”

This post is to motivate anyone who is an employee to stay on top of changes to their payroll situation.  The following examples can provide a taste of items that you can help with.

1. Getting married. This requires a change to the filing status on the federal and maybe state W-4 forms.  Those with the married filing status often see significantly lower withholding.  If you don’t make this change, you may receive a much larger than is necessary tax refund.
2. Changing state.  Generally, withholding is required in the state where you work.  If you change states, you need to make sure and complete a new federal and state W-4 to notify your payroll department of the change.  Without this change, you may end up with no withholding where payments were required.  This would force you to file a return in the state with incorrect withholding in order to get a refund of this money so you can forward it to the correct location.  This is such a hassle!
3. Garnishments/Levies/Child Support. If you have paid off the amount that was being withheld from your check and you do not follow up with that entity quickly enough, your payroll department will have no idea they are supposed to discontinue withholding.  This means you will end up paying money for something that you don’t owe.  It’s often really difficult to get this money back in a timely fashion.
4. Terminations. This one really is the job of the manager or supervisor of employees.  If you do not complete the necessary paperwork with the payroll department, you could allow an employee to continue to be paid for no work.  That means you as a boss are directly hurting the profitability of your company.  Unless in the case of a mass layoff or headcount reduction policy, employees are normally terminated for cause.  Why pay them extra?  They may already be receiving termination payments at the same time.  It is very difficult for a company to recover these funds.  It’s so much easier just to communicate the event to payroll

These events are more common that most people realize.  By staying on top of these issues before they create a problem you are helping improve company profitability, reduce stress of employees, and reduce confusion with employees.

Health Care and Overtime—Do the Twain Meet in 2014?

This month’s post from guest blogger, Vicki Lambert:

The passage of the Affordable Care Act has certainly generated questions in the payroll
community. Will the taxation of health care change? No it is still nontaxable. Will it need to be
reported on the Form W-2 anyway? Yes, but not mandatory until 2012. But one question is still
outstanding and is in fact not being raised quite as strongly as the other two and that is… Will
health insurance being paid for by employers have to be included in calculating regular rate of
pay under the Fair Labor Standards Act?

The law states that employers must offer their employees’ health care coverage or face a penalty
beginning in 2014. The law does not give a mandate that employers must offer health care, only
that they will be penalized if they don’t. And there is an exception for under a certain number of
employees so small employers will not be penalized at all. This is as close to a mandate on fringe
benefits as we have ever come on the national level.

The question arises because the Fair Labor Standards Act requires that all remuneration for
employment unless specifically excluded be included in the regular rate of pay for overtime
calculations. These excluded items are sometimes referred to as “statutory exclusions” and
they are spelled out in the laws. For example, payments for hours not worked are excluded.
These include the fringe benefits of vacation, sick or holiday pay. But these are specifically
listed and are made in most cases voluntarily by the employer. It also lists payments made to
a bona fide plan providing old-age, life or health insurance. But these are contributions made
on behalf of the employee to the employer’s plan. Does this change if the employer is making
the contribution to avoid a penalty by the government? Does this now make the payment
remuneration?

I contacted the Department of Labor directly to find the answers to these questions. I was
referred to the Employee Benefits Security Administration (EBSA). They’re answer…they don’t
know yet. They are looking into the matter to make a determination. The new law is just not
clear enough right now. This is unchartered territory with a new concept for employers in the 21st
century hitting smack up against a law written in 1938. So we will have to wait and see if we
need to include the payment for health care in the regular rate of pay in 2014.

In the meantime maybe this should open up the debate of whether or not these older wage and
hour laws should be revisited for the 21st century. But that is the topic for another blog.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

2011 Paycheck Changes

By now, most employees in the United States have received their first paycheck of 2011.  About the same time the first check is received, payroll departments across the country were deluged with questions about the changes on employee checks.  This edition of the blog should help to clear up some of the confusion regarding a couple of these changes.

The Making Work Pay Credit is gone!  The implementation of this tax cut was sloppy anyway.  Single folks received up to $400 of tax cuts per year factored into their withholding.  Married folks received twice this amount or up to $800.  There was an upper limit to allowable income.  The credit itself was described in detail in a blog post almost two years ago.  In the tax cut bill that Congress finally passed in mid December, the Making Work Pay credit was happily missing.  That means however, that employees of nearly every income level will see their Federal Income Tax withholding increase for 2011.  It’s quite a shock in the amount of increase.  However, there are no more funny games to play when preparing your tax return or figuring out your W-4 values.  In summary, most employees will see their Federal Income Tax Withholding line increase.

Part two of the changes to employee checks this year has to do with the Social Security component of FICA withholding.  Normally, Social Security withholding is 6.2% of taxable wages up to a base.  That base is $106,800 per year as it has been for 3 years now.  Employers must match the 6.2% value meaning total Social Security taxes are actually 12.4% of taxable wages up to the base or up to $13243.20 per year per employee.  Self employed individuals paid the entire 12.4%.  This is a lot of money!  The above referenced tax cut bill cut the employee portion of Social Security by 2 percentage points.  Now the total is 4.2% up to the base.  Employers still are required to pay their portion at 6.2%.  Self-employed individuals now pay only 10.4% as well.

PaycheckCity, a site run by Symmetry Software (my day job employer), had implemented these changes and placed them on the site in late December.  To my surprise, the help desk team at PaycheckCity reported that CPAs and payroll staff members were writing with questions on why the Social Security rate was different.  Some even adamantly (and ignorantly) proclaimed that we were wrong and they would never use the site again.  The details of the tax plan have been all over the media in the last month.  Social media has trumpeted the changes as well through the many different outlets.  How anyone can still be unaware of this change just baffles me.  Hopefully,  I have provided some knowledge to those who hadn’t heard yet, while clearing up the confusion for those who had and were surprised at the change on their check.

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

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

Sole Proprietor on Payroll?

A good question today for discussion:
“My husband is self-employed with no other employees.  I generate his paychecks.  This year, he has been doing a few jobs outside of our county; therefore, the local tax amounts vary from county to county.  The payroll program I use is a very basic program so there are not a lot of different options to use.  (This is a new program I started using this year.)  To keep local taxes correct, I have to issue him a check for each job completed outside of our county.  When I generated a paycheck to him for a small job in a different county, ($300 paycheck), I noticed there were no federal withholding taxes.  I didn’t know this before, but it appears tax calculations are different based on daily, weekly, monthly, etc. pay periods.  I played around with this in the program and noticed the variance each time I changed this option.  With the flexibility of him being self-employed, I generate a paycheck on an as-needed basis to cover our personal needs.  It is never a fixed amount and the frequency varies. Taking the issue of local tax variances out of the picture, I am now worried if the federal and state taxes are being calculated correctly because of the varied amounts and time frames of the paychecks.  I don’t know whether to choose the option of him getting paid daily, weekly, bi-monthly or monthly. The federal and state withholdings changes in each of these categories.  I feel that it is incorrect to have no federal withholding if I generate a paycheck to him for only $300.00.  Can you help?”

A.  Your question contains one of the most common misconceptions of those who are self-employed.  You did not state if you were an LLC, S corp or a C corp.  I assume by your use of the words “self-employed” that you are simply a Schedule C filer with the IRS.  Most of the included fact pattern is actually irrelevant to answer your question.  Simply put, schedule C sole proprietors do not receive paychecks.  The profit earned from the business each year is the “paycheck” for your husband for tax purposes.  You will pay income taxes based on the profit of the business, less any allowed personal deductions on the form 1040.  Self-employed individuals make estimated payments to the IRS based on their estimated tax liability each year.  These estimated payments are made on a quarterly basis.  Your CPA or tax adviser should be able to look at your situation and determine what estimated payments are required.

While you do not have employees now, it is important to note that when you do have employees, you should match your pay frequency with the way you pay.  If you are having employees work in a different city each day, and your payroll system cannot accommodate multiple city tax rates, you would pay based upon a daily frequency for federal, state and local purposes.  If you pay daily and use any other table, the amount of wages will be too low to trigger withholding for federal and state in most cases.  If you think about it, $300 per day is about $81,000 when annualized (assuming a 270 day work year).  If you annualized $300 using a weekly table, it only adds up to $15,600 of gross wages.  There must be a low-cost system available that could handle such a problem when you get to the point of actually having employees and needing it.

——-
Samuel Kerch, CPA

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.

Yikes, A Big Tax Bill!!!

Q. My husband works for a large company, and I receive disability and do not work.  We just had our taxes done this week and got quite a shock!  We had a federal income tax refund of over $4000, but owed state tax of $1000 and local taxes of $600.  We are in PA.  How can we adjust our withholding so that this does not happen again next year?

A.  When payroll people hear the Pennsylvania, they run screaming from the room.  The local tax debacle there is the stuff legends are made of.  In most states, when someone has too little withholding, an employee can simply get a copy of the state’s W-4 equivalent, and reduce the number of allowances claimed.  This has the effect of increasing the amount of income subject to tax and thus increasing the tax withheld.  Unfortunately, in PA, there is no W-4 equivalent.  PA is calculated as a flat percentage of taxable income, 3.07% to be exact.  I’m not sure where to point you on this one.  Did you have non-wage income like dividends or capital gains that were not taxed?  Do you have a small business on the side where there were no estimated payments made?  Perhaps the payroll system at your husband’s employer has a way to allow for additional withholding beyond the standard percentage.

For the local tax, there is again no W-4 equivalent in most cases.  However, there is very likely an obvious cause for this under withholding.  In PA, employers are required to withhold where the employee works.  If he works in a different jurisdiction than the one he lives in, then the withholding rate will be lower.  He will have the non-resident rate applied to his wages.  In most cases for PA, the resident rate is 1% (could be higher) and the non-resident rate is half of that.  Therefore, he could have only half as much tax taken from his check as was required.  If an employer opts to withhold at the higher resident rate, it is called courtesy withholding.  Not all employers wish to do this because of the extra record keeping requirements.  Check with your employer to see what is possible with regards to increasing the local tax withholding as well.

Filing Status? What is that?

Q. My payroll person told me that the filing status on the W-4 doesn’t necessarily mean the same thing as my marital status.  Is that true?  What is filing status?

A. Filing status on the W-4 and filing status on your tax return are not necessarily the same thing.  The W-4 drives withholding only.  The withholding formulas issued by the IRS come in only two flavors, married and single.  Any other situation is handled by the number of allowances claimed.  Other situations include head of household, children and multiple jobs.  In certain situations, if married folks claim married on their W-4s, they will not have enough withholding.  By switching over to the single withholding formula, additional withholding takes place.  Some companies use the W-4 to determine the marital status of their employees.  This is not a good policy. In fact, if an employer receives a lock-in letter for a specific employee, he/she may be directed to withhold at Single with zero allowances regardless of the marital status of the employee.

On your tax return, the rules are different.  You are only allowed to claim married if you are in fact married.  If you are married, you cannot claim single.  There is a special status called married filing separately for those who wish to use it.  Certain situations may warrant this for better tax treatment.  The key here is that your marital status on the last day of the tax year determines your status for the tax return for that year.

I hope this helps.

Publication 15 is Out!!

Hooray!!  The annual update to the document every employer is anticipating finally occurred. Okay, maybe not all employers were as excited to see this as I was.  Publication 15 should be every employer’s best friend.  This document contains instructions on everything from obtaining an Employer Identification Number (EIN) to withholding, to employer taxes.

How does a business determine if it has employees or contractors? Read page 8 section 2.

What if I want to hire a family member for an employee?  Read page 9 section 3.

How does the IRS define wages?  What is included?  Read page 10 section 5.

How much do I withhold from my employees’ wages?  Read page 39 and 40 if you want to use a formula.  Reference pages 41-60 if you wish to use the charts.  You could also use PaycheckCity.com for this since all the values have already been programmed into all the calculators for the last 10 years.

Have you considered employer costs like FUTA (unemployment)?  Read page 30 section 14.

Do you get the hint yet that this is a very important document?  Some of the most frequent questions I get from employers through the American Payroll Associations member hotline are related to supplemental pay.  This could be bonuses, commissions, overtime pay etc.  There are specific instructions in Publication 15 for the right way to withhold from these types of payments.

Each state that has required withholding will have a similar document.  Employers should also find and download a version of the state document to make sure they understand specific requirements for their state that may be different than the federal information.