Dave Cain: Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory podcast that challenges your old school business practices and their traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful, modern solutions to help enhance your company’s growth. And I’m your host for today, Dave King. Managing your business’ payroll requires you to do more than just write a few checks or push a button for direct deposits, to your employees each month.
Dave: For example, when you hire a new employee you have to collect a bunch of information before you even think about putting them to work for you. But do you what all that information is, where it goes, where it should be stored, and why it matters? And after gathering your employee’s information do you know which forms you need to maintain in the event you are called on for a audit? Dee Gray, a certified payroll professional and client service specialist in Rea’s, New Philadelphia, Ohio office, is here to help us understand the payroll function a little better. Welcome to unsuitable, Dee.
Dee Gray: Thanks Dave, it’s good to be here.
Dave: We always love to have guests from our New Philadelphia office. Most of our listeners may not know that that’s where Rea & Associates started back in 1938 by Richard Rea.
Dee: You got it.
Dave: So we always love guests from HQ as they say. So we wanna talk about payroll today. It’s early 2019 so I guess there could be some folks still trying to get their W2’s and 1099’s out the door, even may be past the deadline. Any piece of advice if some of those W2’s are wrong?
Dee: Well you wanna correct anything that’s wrong as soon as possible. As soon as you discover the error, you should start correcting it. The deadlines for the W2’s, the 1095’s, and the 1099’s with non-employee compensation have all been moved to January 31st. So that’s a relatively new change. Make sure you’re aware of the new deadlines.
Dave: And as we have found the IRS can be helpful if you make an error. But you gotta get after it pretty quickly if you do find some information that might have been missed.
Dee: Absolutely. The IRS sends out notices with interest and penalties added on almost automatically. The faster you address the issue, the less the penalties and interest will be. They actually have what’s called a first time abatement. It’s almost a get out of jail free card.
Dave: All right, yes.
Dee: If you’re aware of it, as soon as you get that first penalty notice you can just call them or write a letter requesting a first time abatement consideration and that penalty will automatically be removed. You can only do that once every three years but it’s worth knowing that you can do it.
Dave: So the bottom line is there, if any listeners receive a letter, get it to your tax professional very quickly. They don’t have one, they can look you up on the website, look at your bio and you can certainly help them through that.
Dave: Maze of whatever that is called these days. But it is confusing. How long you’ve been doing payroll?
Dee: I’ve been doing payroll for about 15 years.
Dave: 15 years.
Dee: It’s been my focus for the past 10 years. So quite a while.
Dave: Plus you have extensive QuickBooks strategy or experience as well but you can help an individual get their payroll properly recorded into QuickBooks.
Dee: Yes. Whether it’s using an outside provider and importing the information into QuickBooks so that it works in mostly with your year-end work or your tax returns for your accountants. We can absolutely do that.
Dave: We constantly hear that, hey payroll, it’s not an area of risk, it’s a low risk area. It’s pretty easy. You just plug numbers into a computer. I think we have found that that’s definitely not the case.
Dee: Not the case. My experience with payroll is it’s the biggest noticed generator that you can possibly have in a business. Whether the notices are accurate or not, you will respond to more notices with payroll than I think with any other activity that you can do as a business owner.
Dave: Well sure, because you have the federal, you have various levels at the state. You could have worker’s comp, unemployment. Then you have the local level.
Dee: Right. So for the federal level, you have the FICA tax. So you have the Social Security and Medicare, which the employer has to match. Then the federal withholding, all of that has be to remitted on a specific schedule based on your past history of payments. The same with the state, it’s based on your past history of liability. Decides how you pay your tax going forward. The state laws are all different. So you have to be very careful that you’re following the appropriate state laws. I would say Ohio and Pennsylvania have the most complex state laws … of any the states, right.
Dave: Yeah, let’s talk about the first thing, and again, that you mentioned where you have employees that work in multiple states. Or multiple cities.
Dave: And maybe work in one city but don’t live in the city. That’s just a challenge, left and right for me to do it.
Dee: It is interesting. So that’s something that your payroll professional should be capable of handling. Basically in Ohio you are required to withhold the local based on where the business is located. You can choose to withhold the local based on the employee’s address, in address to what is required to be withheld from the business address. But you are required to withhold based on the business address. If you have an employee that works in different cities, say they are in construction, the 21st day they work in a particular city, you are required to withhold and remit tax to that city. It doesn’t go backwards but it does start on the 21st day.
Dave: Wow, you do know these rules left and right. Don’t you? You been doing it for a while.
Dee: We’ve been doing it for a while.
Dave: Yeah. So is the cutting of a live check, is that a thing of the past? Are most of the businesses you are working with, are they direct deposit?
Dee: We, where we’re located at do still have a lot of live checks. We have a lot of people in the Amish community that we process payroll for. But we do the majority of them are direct deposit.
Dave: Just rare instance you might have … And tell me about the frequency. What are you run into it? Is it weekly, bi-weekly, what are you seeing out there?
Dee: We see a little bit of everything. The majority is bi-weekly.
Dee: That seems to be pretty much the standard. We have some bi-monthly, monthly, weekly. Pretty much anything you can think of but the standard generally leans towards bi-weekly.
Dave: Sure. I wanna share a story with you, maybe you can comment but recently I was talking to a colleague in the CPA industry. They ran across, one of their clients had received an IRS notice, a pretty nasty notice where the employment taxes had not been remitted. The 941, the Social Security and the withholding and it was well over $100,000. The business owner had not idea that it occurred and as he dug through that, he found their, a key member of the accounting department internally, and in their payroll, had the payroll function. Had not remitted the taxes.
Dee: That’s unfortunate. And it does happen. But the ultimate responsibility is on the employer. The reason that it is not being remitted does not matter. The employer is going to be the one with the liability and the responsibility for making sure that that happens.
Dave: So let’s go through that again. You just hit a nerve there. So as the owner, if my accounting department has messed up, not remitted, I’m on the hook.
Dee: That’s correct. If you’re using an outside provider for your payroll, and that provider is not remitting your withholding tax. You’re on the hook.
Dave: I’m on the hook. You got any other good news for me?
Dee: Make sure it’s being remitted.
Dave: Yes. I mean that’s kind of the center of our discussion today is payroll can trigger a huge risk to business owners and they may not even know about it.
Dee: It can. There should be checks and balances in place. If you have an outside firm that’s processing your payroll, you should be reviewing the reports that you get. You should be reviewing your year-end reports, the W2’s. Don’t blindly trust that everything is being handled appropriately. Just double check and follow up.
Dave: Sure, okay. As we go through the rest of our time here, we’ll talk about a couple key areas. One is payroll options for employers and basically there are two options. One, you can do it yourself. Or you can certainly outsource it like to Rea & Associates or another payroll professional. So those are basically the two options. What are you seeing, are the majority of businesses outsourcing?
Dee: I say the majority of businesses are outsourcing. Payroll is a huge risk. And although the ultimate responsibility does lie with the client, having somebody who knows what they’re doing, who has a process for what they’re doing, can really help avoid any issues that may pop up. When issues do come up, then you have somebody to help walk you through the process of handling them.
Dave: Sure, sure. In the case of full disclosure, here at Rea & Associates, we outsource our payroll to a third party.
Dave: But we have the controls in place to make sure those things happen. Whenever I talk to somebody about that and say, “Well we outsource our payroll,” they look at me like you crazy fool. You’re a CPA firm, why aren’t you doing your own payroll? Well for the exact reason are clients aren’t doing their payroll. It’s just a different control feature. And again, in a lot of businesses the accounting department has many duties. Financial statements, various loan covenant reporting, you name it. And you pile payroll on top of that, they may run out of time and may not do it properly.
Dee: Right. They can quickly be overwhelmed and if they feel like the paycheck is the end result and they push it aside to work on something else, then there can be things that aren’t getting completed because they’re overwhelmed with their other duties.
Dave: And that’s where a firm like Rea & Associates and yourself as a payroll professional can step in and help give them back some valuable time.
Dee: Right, right. The outsourcing of payroll really does save an internal department a lot of time. It takes a lot off their plate.
Dave: We constantly hear in the audit environments about fraud being reported or within a business. Every now and then you hear it’s in the payroll area. Maybe payroll taxes didn’t get remitted for whatever reason. Maybe somebody that was in charge of payroll without checks and balances maybe put a few extra hours of vacation on their paycheck.
Dee: That’s true. I would always recommend whoever is cutting the checks, whether they’re payroll checks or payables checks, that should not be the person doing your bank reconciliation. If you wanna talk about a separation of duty, that’s a great place to have a separation of duty in there. You want somebody else doing the reconciliation and just glancing through the check copies that’s not responsible for writing the checks.
Dave: So there’s some wonderful … The first takeaway I guess we have is there are some payroll options for employers that are beneficial and I think a lot of it is an internal control, like you just mentioned. You play a important role in a company with protecting assets in internal control. By overseeing the payroll.
Dee: That’s true because we would send the information back to the client and somebody actually in the client’s office would be doing the bank reconciliation. So they’re double checking our work basically.
Dave: Right, right. Hey do you ever get a call like on Friday night at 7:00 and somebody says, “Hey my payroll check is wrong?”
Dee: You bet I do although usually it’s a text. They don’t usually call after 7:00.
Dee: But yes, absolutely we do. We will do whatever we can to help them correct the issue at that time. Sometimes they’ll have to wait until Monday morning. But it does happen for sure.
Dave: ‘Cause it may involve a transfer to the bank or maybe somebody just overlooked some hours or whatever. It may have started back at the employer level before we even got the information.
Dave: Those calls do come.
Dee: They do. Calls, emails, text, absolutely. If it’s not Friday at 7:00, we handle it pretty quickly.
Dave: Oh yeah.
Dee: But they definitely come in, yes.
Dave: Let’s switch gears a bit. Let’s say that I’m either a new business or an existing business that wants to outsource my payroll. And let’s say we’re sitting down having a conversation. I say, “Dee, I have no idea where to start. I’m trying to run the business here. But I need to get my people paid. They’re doing a great job. We gotta do some things differently.” Where do we start? Where’s our conversation start?
Dee: Well beginning the conversation is a great place to start. But you want to go with somebody that you feel comfortable with. I would assume that if we’re having this conversation, either you’re comfortable with us or recommendation has been made. There are considerations too, some of the bigger just payroll providers will sweep the funds so that everything comes out of your checking account at one time. Then they pay all of your taxes from that. There are other payroll companies which the way Rea & Associates does it, we do everything on an individual basis. So if you’re writing live checks each of those live checks will clear from your account. So you kind of need to know what you want it to look like on your end. I would say that would be the first step.
Dave: Little bit of cash flow issue there.
Dave: Okay, okay. And timeliness. So that’s first thing we gotta kind of identify what exactly you’re gonna talk to me and say, “Hey, what’s your goal, what do you wanna do here?”
Dee: Right. Then the next step would be just understanding if you’ve never had payroll before, understanding what your responsibilities are going to be. What your expenses are going to be. That it’s not just withholding from the employee’s paycheck. But that the employer has obligations as well. That they have to match the Social Security and Medicare withholding. That they have to pay federal unemployment. They have to pay state unemployment. They have to pay worker’s comp in every state. So there are expenses besides the payroll preparation expense that they’re gonna be looking at.
Dave: Dee this sounds like just big time hassle. Why don’t I just treat my quote employees as independent contractors, and not withhold any tax. We’ll just save some money and some headaches.
Dee: I’m sure you not the first person to come up with that idea.
Dave: No. I read that somewhere.
Dee: There are very specific rules about what is considered an employee and what is considered an independent contractor. If you are audited and you have paid someone as an independent contractor that they deem to be an employee, you’re immediately responsible for the Social Security and Medicare that you would’ve been required to pay in the first place and the employee’s portion that would’ve been withheld from their paycheck. That’s immediate, in addition to penalties and interest.
Dave: Fines and penalties and …
Dee: And redoing everything that you’ve had to do. You’ll have to amend all of the returns that have been filed. Definitely not a recommended course of action.
Dave: I think it’s safe to say both you and I are 100% on this, is that that’s not a game to be played. It’s a losing game.
Dee: It’s a losing game.
Dave: And a very expensive game.
Dave: I know we both run into that in our careers. And as our listeners have but I think the IRS is tightening that up even more so. And I think you mentioned to me the worker’s comp. I think that’s another area that if we’re not treating them like employees when they are employees, we could put the business at significant risk.
Dee: That’s absolutely correct.
Dave: What about new hires. Somebody’s coming in the door. Man we’re busy, we need people. Hard to get people. What do I have to have them to get started.
Dee: What you have to give to your payroll provider, and what you are required to keep in an employee file are definitely two different things. I would absolutely check my state laws to make sure that I’m being compliant with all state laws with Fair Labor Standard Act. You are required to have a W4 on file. An I9 on file. But there may be other forms that you’re required to have on file that your payroll provider doesn’t care about because in the case of an audit, again it’s the employer that is responsible for providing the documentation for their workers.
Dave: And you’re going to do all that paperwork for me.
Dee: I can provide you with all that paperwork. I will not maintain that paperwork.
Dave: You’re gonna help me through it. You’re gonna coach me, yeah.
Dee: I will absolutely help you through it.
Dave: Minimal headache for me.
Dee: That’s right.
Dave: That’s what I want. A minimal headache.
Dee: That’s right.
Dave: So also as you go through that, we already talked about all the cities and where you work and where you live and where you play and all that stuff. But every now and then you get these letters about child support and garnishments and you know, look again, that’s a bit of a hassle from the employer standpoint. But do I have to comply with those letters?
Dee: You absolutely have to comply with those letters.
Dee: 100%. Again the liability will come back on the employer if they have received a garnishment and they’re not withholding it, it’s within the garnisher’s power to bring action against the employer. For not complying with the garnishment. The same with child support. You must comply with the child support and the garnishment.
Dave: Plus fines and penalties. One thing I think we kind of overlook it, when the event occurs, when the occurrence happens … And by the time you get the letter that says you’re not in compliance, it could be a year. It could be two years.
Dee: That’s correct and so-
Dave: We’re dealing with a fact it’s two years after.
Dee: It’s all adding up and you’re just digging yourself a bigger hole.
Dave: You’d mention the FLSA, the exempt vs. non-exempt employees. I’m not sure I quite understand that. Can you give me a two second, whatever that is.
Dee: The Fair Labor Standard Act does-
Dave: Do I have to follow that?
Dee: Differentiate. The Fair Labor Standard Act? You can Google it.
Dave: Sounds like I do. I can Google it. I know I can …
Dee: Yes, you do have to follow it.
Dave: I have no choice.
Dee: Everybody has to follow it. That is accurate.
Dave: Oh, okay.
Dee: They do differentiate between exempt employees and non-exempt employees. Non-exempt employees, you’re required to pay overtime. Exempt employees you are not necessarily required to pay overtime. But there are specific criteria that the exempt employees have to meet in order to qualify as an exempt employee.
Dave: You know that’s a tough one. There’s been some new legislating in the past several years on that that have really, really tightened that up.
Dee: Yeah, it’ll be interesting to see where that goes.
Dave: Is it going any place good?
Dee: Well I don’t know. You know it was, it seemed to be making some progress and then they stopped it. I’m not sure whether it was good or bad progress but everybody was making the effort to comply and then it was backtracked at the last minute. So it’s kind of just-
Dave: It’s coming.
Dee: Waiting now to see-
Dave: It’s coming, fast and furious.
Dee: It will at some point.
Dave: We haven’t talked about 401k’s and Section 125, which is I think is the cafeteria plan. Those are … Let’s call ’em benefits that employer has in providing employees. Obviously that’s gotta make my payroll all that more difficult.
Dee: It does make it more complex. If you are offering benefits to your employees such as insurance, medical insurance or dependent care benefits or health saving accounts. It will benefit the company to have a cafeteria plan in place. You do need to make sure that it covers all the benefits you plan to offer or if you have a new offering, you’ll need to add it to your plan so that it’s covered. There are certain people that cannot participate in a Section 125 plan. Sole proprietors, partners, shareholders. More than 2% shareholders of an S corporation cannot participate in a Section 125 plan and neither can their spouses, their children, their parents, or their grandparents.
Dave: This is way above my head. This is why I don’t do payroll.
Dee: It’s why you outsource.
Dave: I totally would mess that up. Or my accounting staff would ask me and I’d totally give them the wrong answer.
Dee: That happens.
Dave: But you know, again, all those benefits, some of them may be tax-exempt or tax deferred. Some may not be. Again if you don’t get it right in the payroll system, it could-
Dee: You’re gonna be amending W2’s. You’re gonna be amending payroll tax forms.
Dave: It could take you years. Kind of as a recap, we talked about the payroll options for employees. What it takes to get up and running to outsource and we went through a laundry. Let’s finish up with protect the business and defend the business and what employee forms you should have and maintain in a case of an audit. I guess it’s record retention. What do you suggest in that area?
Dee: I would say at minimum you need to have a current W4 and an I9 on file. I’m sure that there are other recommendations based on the state but at absolute minimum, those two forms should file for every employee.
Dave: I think we’ve seen a W4 for many, many years. The I9, just as a quick review. What is the I9?
Dee: That’s the form that proved that you’re legal to work in the United States.
Dave: So that’s even more critical in today’s environment than it’s ever been.
Dee: That’s probably an accurate statement, yes. And the W4 is about to undergo a big transformation.
Dave: That’s right, we had tax law change didn’t we?
Dee: We did. They’ve put that on hold. The 2019 form is not changing significantly. But look for a change in 2020.
Dave: If I wanna hire you to do my payroll. By the time we sit down and talk, what’s the lead time before we can get started?
Dee: It depends on the size of the payroll but basically two weeks or so.
Dave: Okay. Okay. Now here’s the ultimate question. When you’re in your office, working away doing payroll do you listen to music?
Dee: I do listen to music.
Dave: And what do you listen to?
Dee: I listen to 80’s hair bands.
Dave: 80’s hair band. Any hall of famers there. Any Def Leppard?
Dee: You betcha.
Dave: You’ve got it. So there you go. Our guest today has been Dee Gray. A certified payroll professional and client service specialist from Rea & Associates in New Philadelphia, Ohio. Dee, thanks for joining us today. Great source of data.
Dee: Thank you very much.
Dave: We’ve never taken such an in-depth look at the payroll function before and I’m sure we could go a lot deeper, time permitting. We’ll have to have you back on the show on of these days.
Dee: Sounds good.
Dave: Really enlightening conversation. Thanks again. Did you enjoy today’s episode? Let us know. Like it, comment on it. Or share it. And don’t forget to check out videos of our podcast on YouTube. Until next time, I’m Dave King encouraging you to loosen up your tie and think outside the box.
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