2015 common payroll issues - RIVIO
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Common Payroll Issues
In today’s business environment, employers must be well-versed in tax, employment, and benefits guidelines to maintain compliance with all the various regulations. Based on the experience of Paychex, Inc. in working with hundreds of thousands of employers, the information that follows includes the most common payroll pitfalls that companies may encounter, and should be aware of, to help avoid hefty fines.
Accuracy of Social Security Numbers
To ensure accurate and timely W-2 filing, employers must ensure that they provide accurate social security numbers on their employees’ W-2s. A W-2 filed with the Social Security Administration with an incorrect or missing social security number and/or employee name will be held in suspense and the wages will not be credited to the employee. The Social Security Administration provides a tool that employers can use to verify the social security number matches the employee name. The Social Security Number Verification Service (SSNVS) is available for free on the SSA website at .
Taxation of Tips and Service Charges
The Internal Revenue Service (IRS) has guidance clarifying the taxability of tips and service charges. A tip is subject to special withholding rules, while a service charge is treated as any other taxable wage. A service charge should not be included with tips when calculating the tip credit.
To determine whether a payment is a tip or a service charge, the following IRS guidelines can be used:
1. The payment must be made free from compulsion.
2. The customer must have the unrestricted right to determine the amount.
3. The payment should not be the subject of negotiation or dictated by employer policy.
4. Generally, the customer has the right to determine who receives the payment.
If a payment does not meet any of these criteria, it is considered a service charge.
FUTA Credit Reductions
Again in 2014, a number of states were classified as credit reduction states for federal unemployment (FUTA) tax purposes. States that had a FUTA credit reduction for 2014 include: California, Connecticut, Indiana, Kentucky, New York, North Carolina, Ohio, and the Virgin Islands. States that have an outstanding federal loan balance have until November 2015 to pay off their loans or be subject to a credit reduction on their 2015 FUTA tax return.
Employee Misclassification (employee vs. independent contractor)
One of the most common mistakes made by small business owners is not properly classifying workers. It is critical that small businesses understand the distinction between an employee and an independent contractor and the various guidelines used to make the determination.
As a general rule, you must withhold income taxes, withhold and pay social security and medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
Properly classifying workers can alleviate confusion and possible fines against the company. For more information about worker classification for tax purposes, refer to the IRS website at: .
Note: There are other laws and regulations that apply to classifying workers including state and federal wage and hour laws.
Overtime Rules
An employer who requires or permits a non-exempt employee to work overtime is required to compensate the employee with the appropriate premium pay for such overtime work. All non-exempt employees covered by the federal Fair Labor Standards Act (FLSA) must receive overtime pay for hours worked in excess of 40 in a workweek at a rate of at least one and one-half times their regular rate of pay. Employers should refer to the FLSA's regulations to ensure appropriate classification of exempt vs. non-exempt employees and to identify those employees entitled to overtime pay.
The FLSA does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime hours are worked on such days. State laws may vary and may require additional premium pay for hours worked. Premium pay for working weekends or nights may also be a matter of agreement between the employer and the employee (or the employee’s representative).
Ensuring payment of appropriate overtime rates to eligible non-exempt employees can help employers avoid potential fines and penalties associated with non-compliance.
Exempt vs. Non-Exempt
Some employees may be exempt from the minimum wage and overtime provisions of the federal wage and hour law, the Fair Labor Standards Act (FLSA). These employees may also be exempt from similar provisions under state wage and hour laws. One example of exempt employees under the FLSA is the white collar exemptions: executive, administrative, professional, certain computer professionals, and outside sales. These exempt employees must generally be paid a minimum amount on a salary and/or fee basis, which is not subject to reduction based on the quality or quantity of work performed.
The FLSA, enforced by the U.S. Department of Labor, Wage and Hour Division, requires employers to pay non-exempt employees a minimum hourly wage rate and overtime pay for hours worked in excess of 40 in a work week of at least one and one-half times their regular rate of pay. Implementing regulations for the FLSA define working time for purposes of compensation.
Employers are encouraged to ensure proper classification of their employees under both state and federal law to avoid the possible unplanned financial burden of penalties and fines associated with wage and hour violations.
Garnishments and Child Support
Wage garnishment takes the form of a court order requiring an employer to withhold an employee’s earnings for the payment of a debt. Title III of the Consumer Credit Protection Act prohibits an employer from discharging employees because their earnings have been subject to garnishment for any one debt, regardless of the number of levies made or proceedings brought to collect it.
Employers must always include the employee case number with garnishment payments. This simple component of conscientious recordkeeping makes the posting process much more efficient for the garnishing agency and may save the employer from the possibility of delinquency notices.
Employers must also be mindful of federal and state new-hire requirements. New-hire reporting is the process by which an employer reports information about newly hired employees to a designated state agency shortly after the date of hire. New-hire reports are matched against child support records at the state and national levels to locate parents who owe child support monies. This is especially helpful for interstate cases (in which one parent lives in a different state from the child), which are often the most difficult cases for states to resolve. With new-hire reporting, state child support enforcement agencies can issue income-withholding orders, the most effective means of collecting child support in a timely fashion.
When multiple garnishment orders are in effect, the employer has to consider which orders take precedence over others. The employer must also be mindful of the maximum percentage of the employee’s wages that may be garnished.
Small Business Tax Credit
As part of the Patient Protection and Affordable Care Act (PPACA) the Internal Revenue Service (IRS) implemented the Small Business Tax Credit. This was designed to offer small businesses a tax credit for offering a qualified health insurance plan to its employees and paying at least 50% of the plan’s cost.
To receive a credit (50% for profit businesses and 35% for tax-exempt employers beginning in 2014), the employer had to employ fewer than 25 full-time equivalent employees that earned, on average, less than $50,000 per year (as adjusted for inflation in 2014). However, a full credit could only be obtained if the employer had 10 or fewer full-time equivalent employees earning, on average, $25,400 or less per year. In addition, the credit will be limited to two consecutive years after January 1, 2014 and employers must purchase coverage through the SHOP.
The tax preparation of the credit is believed to be time consuming for some, for the amount of credit that they are entitled to receive. For many business owners, it was difficult to easily determine if they were eligible for a credit at all. So, rather than paying for the additional time it would take to determine if there was a credit, many chose to ignore it altogether.
Tax Agency ID Requirements
Each business must have a valid, agency-assigned identification (ID) number for each tax agency. Employers without valid agency ID numbers should consult federal, state, and local tax agencies and follow the appropriate registration protocol to secure their ID. Tax returns filed and/or payments remitted without referencing a valid agency ID may delay proper posting of information to the respective employers’ account and could likely result in penalty and interest assessments.
A federal tax ID number or federal employer identification number (EIN) is similar to a social security number for a business. The IRS uses the EIN to identify a business and the ID must be included on all tax filings. Banks also typically require an EIN to open a business bank account. Other companies with which an employer does business may ask for an ID number to pay submitted invoices.
For information about obtaining a federal EIN or to apply for a number online, go to:
States require a unique identification number for the same reasons. For information about registering with an agency to obtain a specific tax agency ID, visit:
Keeping Abreast of Regulatory Changes
One of the great values in working with Paychex is that our regulatory experts are constantly monitoring compliance-related issues that may impact our clients across the country.
Each year brings a series of new regulatory, compliance, and legislative changes that can affect every small business. Paychex continuously monitors regulations that could have significant impact on employers’ payroll, taxes, and retirement plans.
Many states continue to face critical budget shortfalls and, as such, may impose impromptu tax/fee increases or filing changes to raise badly needed revenue.
Unemployment insurance (UI) funds in many states are at critically low levels due to the large numbers of people out of work for extended periods. Many employers will see continued increases of state employer UI contribution rates to replenish depleted UI trust funds and repay federal loans taken to allow states to continue to pay benefits.
Staying on top of the new payroll and tax laws can be burdensome. Understanding the requirements of these rules and laws requires even more time and effort. Paychex clients can rest assured that we’re on top of these issues and will be there to help navigate the constantly changing regulatory environment.
This content has been provided by Paychex, Inc. For more information on how we can help, visit or call 1-800-322-7292.
Publication date January 2015. The material contained above is current only as of the date of publication. These materials are for informational purposes only. They are not legal advice and should not be relied on as such. You should contact your attorney to obtain advice with respect to any particular issue or problem.
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