Doug Houser: From Rea & Associates, this is unsuitable, a management financial services podcast for entrepreneurs and your business leaders and others who are ready to look beyond the suit and tie culture for meaningful measurable results. I’m Doug Houser.
Payroll is one of your company’s most critical areas to manage and probably one of the most scrutinized. Employees expect to receive their paychecks on a certain day and time and they expect their checks to reflect the time they put into their job. The IRS and state and local tax authorities expect taxes to be withheld and the Department of Labor expects your employees to be legally eligible to work in the United States. And if that wasn’t enough, changes and proposed changes are giving business owners even more to worry about.
Dee Gray, a certified payroll professional at Rea continues to be on the lookout for news regarding the new form W-4, the potential increase in minimum salary for exempt employees and possible changes to the overtime rules. On today’s show, Dee will walk us through what she’s seeing while providing us with tips to help us prepare for whatever changes may come our way. Welcome Dee.
Dee Gray: Thanks for having me, Doug.
Doug: Great to see you here. So, no buttons today.
Dee: No buttons today.
Doug: What’s the button story?
Dee: We had a little disaster the last time I was here to record the podcast. So we went with no buttons and bright red.
Doug: Lesson learned, I guess. Okay, very nice.
Tell us a little bit about what’s going on in the payroll world. Obviously a lot of changes, proposed legislation, it seems like we can hardly keep up these days.
Dee: We really can hardly keep up these days. There’s something new coming out all the time and just as you put it into place, they put the brakes on it and start with something else. That’s kind of what we’re dealing with with the new W-4. They anticipated a new W-4 for 2019 but there was so much negative feedback that they put it on hold. It does look like the new W-4 is going to be released for 2020.
Doug: Okay. Major changes coming?
Dee: Major changes. With the personal exemption being gone, they have to reformat the entire W-4. It’s going to be a lot more difficult and less user friendly, but it is supposed to be a lot more accurate on the withholding, so I guess it’s a given take on that one.
Doug: Okay. So, a lot more headache for employers and employees both. Where does the burden lie in your estimation?
Dee: The initial burden lies on the employees in filling out the form. The employers should be as proactive in learning about it as they can be so they can help lead their employees through it. It’s not an intuitive form. It requires a lot more information and it’s not as easy to circumvent the form to get the withholding to be what you want it to be.
Doug: Oh, okay. Again, and that was the case previously. You could sort of designate whatever withholding you preferred.
Dee: Right.
Doug: It’s going to be more difficult, is what you’re saying?
Dee: It is going to be more difficult. There are a lot more questions. They take into consideration whether you work one job or two, whether you have a spouse that works or a spouse that stays at home, whether you have unearned income. All of that is taken into consideration on the new W-4.
Doug: Does not sound like fun.
Dee: I don’t think that it’s going to be fun. You’re not required to have your employees fill out the new form in 2020 which actually almost makes it more difficult because now the software companies have to have dual withholding going on in the background. You can request that all of your employees fill out the new W-4 but you cannot require them to fill it out.
Doug: Okay. But will new hires be required to use the new forms?
Dee: New hires will be required to use the new form, and anyone that wants to change their withholding will also be required to use the new form.
Doug: Okay. Yuck. That sounds like a big mess.
Dee: It kind of does. There is still the option to have an additional amount withheld, which I think is what’s going to save most of the employees.
Doug: Okay. Now, talk to me about this whole concept of exempt employees and non-exempt and overtime and minimum salary and all those kind of rule changes; because I keep reading about all kinds of different proposed levels and where we have to be, and it seems like we’re not straight on that or are we?
Dee: We’re not yet. They had a proposal that actually they put in place or they intended to put in place and it was shut down at the very last minute. So then they were back to the drawing board. The first thing that I would want to say about that is that you can’t just designate someone as a salaried employee. There are certain rules behind that designation. They have to be an administrative professional or an IT professional or they’re… I would recommend definitely looking up the rules for your salaried employees.
In addition to being task-driven, there are also minimum salary requirements for that. That’s what they’re looking at now, is increasing the minimum salary requirements. Currently, an employee has to earn $455 per week minimum to be considered an exempt employee and not subject to overtime. They are looking to increase that to $679 per week. If this all does go through, they’re not putting in an automatic increase. What they’re going to put in the background of that is every four years, the Department of Labor is going to look at where we are now and then decide whether there should be an additional increase or not. But there’s no automatic increase in the background of the new law they’re trying to pass.
Doug: Okay. Now, are these rules, are they at the federal level or can they be set at the state level as well?
Dee: The rules are at the federal level, but there can be state rules that override those. For instance, the federal minimum wage is $7.25. It hasn’t changed for a really long time. A lot of states have a higher minimum wage with different gross income thresholds to put that into place. So there are a lot of different rules that you have to pay attention to in the background.
Doug: Okay. And now, I’ve read in the past that there’s been instances of companies trying to circumvent the exempt non-exempt rules. Restaurants, for example, I think are famous for trying to circumvent paying employees overtime by making them exempt and those kinds of things. How is that, does that change at all or is that enforced very stringently? What is our affair?
Dee: Well, if you get pulled for a Department of Labor audit, it’s going to be enforced pretty stringently and there are actually even different rules in place for tipped employees regarding their minimum wage and the minimum tips that they can report. Again, pay attention to the rules that are in the background.
Doug: Follow the rules.
Dee: Follow the rules.
Doug: If you don’t, then you’re subject to being caught.
Dee: Exactly.
Doug: And I would think, in today’s environment where most of the power of course lies with the employees, not the employer because of the labor market. I mean, shouldn’t the employees have the ability to raise any issues? Where do they go with something like that if they’re being treated, what they perceive as unfairly?
Dee: Honestly, it’s probably as easy as a simple Google search. You can search for the Department of Labor and then you can just go in there, you can file a complaint and they take it from there.
Doug: Okay. Interesting. So what else, what should we be on the lookout for in terms of changes beyond 2020? Anything else on the horizon that you can foresee?
Dee: Well, it’ll be interesting to see. To be honest, the W-4 is the first thing that’s going into place from the Tax and Jobs Act. I’m sure that there are going to be a lot more going into place. My recommendation to employers as this is rolled out is to remind them to look at their pay stub. Always look at your pay stub. If you’re not having enough federal tax withheld in March or April, you can make adjustments to your W-4 to fix that. If you, in February, notice that you had no federal tax withheld for the prior year, there’s nothing that anyone can do about that. You’re on the hook for the tax that you owe.
Doug: Right. So, from an employee perspective, it’s just pay attention and understand where you’re at.
Dee: Absolutely.
Doug: Now, you talked a little bit before about, okay, a payroll audit. What happens in that process? How does somebody get selected? What’s the risk? Do you have some perspective for us there?
Dee: I would say that if you have employees, sooner or later you will have some type of payroll audit. Whether it’s Ohio Bureau of Workers’ Compensation, State Unemployment, IRS audit, plan to be audited. They aren’t necessarily out to penalize people, but they want to make sure that things are being done appropriately. Workers’ comp, you could probably plan to be audited every three to four years, particularly with the changes to their prospective billing versus the retrospective billing that they used to do. So, there are a lot more audit opportunities for workers’ comp in particular.
Doug: Okay. So, if you’re going through say a workers’ comp audit versus the standard payroll on it, what are the differences there? What should somebody be prepared for in terms of having records available, all that? What are best practices there?
Dee: You definitely have to provide the records. The workers’ comp is on a fiscal year instead of a calendar year, which is kind of odd because then you can’t compare to the W-3. But basically they are looking to make sure that you’ve reported all of the wages to workers’ comp that you’ve reported as Medicare wages or to job and family services for your state unemployment and the wages that you’ve reported on your business tax return as well. They’re also looking to make sure that any employees or any, sorry, any subcontractors that you’ve provided with a 1099 are truly subcontractors and not employees that should have been reported.
Doug: Okay. Now, at the payroll audit level, are they looking at records just in a particular state at each time or do those records, are they looking at, say all of the company’s history within a certain period?
Dee: Generally they’re looking at a particular state. They’re usually the individual taxing agencies that are auditing. If it’s an IRS audit, that’s a different ball game.
Doug: Right. So, what’s the risk in terms of penalties and look back periods, things like that. How far back should somebody be keeping their records on the hook for it?
Dee: If it’s an unintentional error, they can go back three years to check and generally the penalties are not huge for an unintentional error. You would have to pay any additional tax that you should have owed and there are some smaller penalties and interest on it. If they feel like it was a willful issue on the company’s part, then they can go back five to seven years and the penalties can be excruciatingly higher.
Doug: Right. If you’ve intentionally misled one of the taxing authorities, then-
Dee: Correct. Or if you’ve had a prior audit with findings where they have clearly told you what you need to be doing and they come back in for another audit and find you’re continuing with your practices.
Doug: So they’ll give you a chance to sort of remediate what you’re doing?
Dee: Yes. They generally do.
Doug: Okay. It’s a little bit friendlier as it were in terms of what they’re looking at. So, okay. Oh, that sounds pretty scary though. I mean, should I be doing this internally if I’m a business owner or is it best to leave it to an outside professional?
Dee: That just depends on your comfort level. If you feel like you can stay on top of all of this stuff, by all means take care of it in house. If you question your ability to stay on top of the tax law changes and the ever changing W-4, I would recommend looking for an outside provider. They generally… the ultimate responsibility does come back to the employer always. But if you have an outside professional processing your payroll, they generally stand behind their work and will take on a portion of that risk.
Doug: So some of that liability, they’ll take on for you?
Dee: Yes.
Doug: In your opinion, is there a best practice in terms of say employee numbers or payroll size where it makes sense internal versus external? I mean, everybody’s different of course, but just in general terms.
Dee: In my opinion, I honestly don’t think that that matters. You can have a violation with a single employee just as easily as you can have a violation with 1500 employees. I’m still going to go back to, it’s your comfort level of who you have in-house providing these services.
Doug: Okay. I always think though, I have a client that recently went through a payroll audit. They do it internally, and I think after the fact they expressed some regret and were rethinking that just because of the pain, let’s say, that they had to go through to try to come up with all the appropriate records, everything. I mean, to me it makes sense, unless you want to devote so much time and energy to doing it internally, why not go ahead and hire a professional and let them do what they do best, right?
Dee: I agree with that. The reality is that a payroll professional has experience with pretty much all types of payroll tax audits. So, for somebody, for a professional to go through an audit is fairly painless. We have relationships with the auditors, we have experience on the types of things that they’re looking for. It’s much quicker and less painful to go through an audit if you have a payroll provider in the background handling that for you.
Doug: Yeah. That makes perfect sense. You talked a little bit about 2020. Now, are there any potential legal changes or court cases that you’re aware of or labor relations decisions that might have an impact going forward that we should be watching out for?
Dee: I’m interested to see where the 1095s are going to go for the Affordable Care Act reporting. My personal opinion is that’s one of the things that they’re going to be looking at taking off the table, but I’ll be interested to see if that happens.
Doug: Okay. So, tell me a little bit about that. What’s required there currently?
Dee: The large employers, which I believe they consider 50 full-time equivalents, are required to provide 1095s and it’s regarding their offering of insurance to their employees. Whether they do or they don’t, whether they’re supposed to or they’re not supposed to, who they have offered it to and who has accepted that offer. If they’re self-insured, what family members are covered under the policy. It’s a pretty big deal.
Doug: Okay. So that, there is potential though obviously if the ACA is found to be unconstitutional or done away with in some form that that will change obviously.
Dee: Well, a portion of the 1095 reporting is because you, at that point, were required to have insurance. The personal mandate has already been removed from that, so I’m not sure how long they’re going to keep auditing whether you’re providing insurance if you’re not required to have it any longer.
Doug: Interesting. Yeah, that wouldn’t seem to make much sense at all. I can’t keep up with all of the goings on in terms of the legal world, but what about the… do you know anything about the National Labor Relations Board and cases that are potentially changing how employees are viewed or treated? I mean, getting back to the kind of the exempt versus non-exempt, those types of rules. I mean, are there any rules like that that could potentially impact businesses going forward?
Dee: I don’t know that they’re planning to change the background requirements for exempt employees, but I think that they’re monitoring more the actual duties. Like, you can’t just say somebody is an administrative professional without being able to back up the duties behind that title.
Doug: Okay. So that that’s again gets me thinking to the documentation and record keeping part of what you’re doing. So all that becomes more and more critical.
Dee: It does. Job classifications, job descriptions, even your employee handbook. All of those things should be maintained in case of an audit.
Doug: Okay. Now I know obviously we have a group here at Rea that helps with that type of thing, with HR consulting, employee handbooks, payroll, all that. Can you talk a little bit about some of the services that we do offer in that regard?
Dee: Yeah, we do now offer the HR services and consulting services, and if you’re a small business and you don’t have an employee handbook, my recommendation would be start there. That employee handbook is your defense. Particularly in the case of a Fair Labor Standards Act or a Department of Labor audit, you have to have your rules in place to show that you’re following them.
Doug: Right. Now, what about this that I’ve heard some potential clients say, “Well, I’ve heard my attorney tell me that it’s best just to not have any documentation or employee handbook. That way I can plead ignorance or that we never told them any of this stuff.” I mean, that seems kind of crazy to me, but what’s your opinion on that?
Dee: I would say their first wrongful termination lawsuit will change their opinion.
Doug: Okay. So, is that kind of thing becoming more prevalent? Do you see that, or employees are more aware of their rights in that sense?
Dee: I do. I think that they are more aware of their rights and I think that we’re a litigation society. I think that it makes it… I think some of the findings have made it more attractive for employees to try to prove that they’ve been wrongfully terminated. A lot of them aren’t just willing to walk on and find the next job. They’re going to,
Doug: They want to enforce their rights-
Dee: Yes.
Doug: Certainly everybody’s more aware with the digital age that we’re in now certainly, right?
Dee: Exactly. I mean, back to the Google search.
Doug: Right. Anybody can Google, right? There you go. What about, are there any issues in terms of say union versus non-union as well? Does that make any difference at all in terms of say the payroll audits or things like that?
Dee: The unions have their own set of rules to a certain extent, but they’re above the federal standard. So, as far as an audit, it really doesn’t make a difference except you may have more things that you have to report on the audit.
Doug: Yeah. We’re certainly aware. We have union clients that have different payroll reporting and things that they have to do-
Dee: Right. Prevailing wage and certified payrolls, and there’s a lot more to a union payroll.
Doug: But they’re very used to, as you said. If anything, I think that makes the record keeping better because they’re used to having to provide that type of information.
Dee: I would agree.
Doug: Very good. Well, thank you Dee. This is great information. Is there anything else that we should be aware of for the rest of 19 and then the 20?
Dee: I would say just keep your eyes open and listen to what’s coming down the pike.
Doug: It sounds like, be diligent, talk to your experts and make sure you maintain proper records and pay attention to what you’re doing. That’s the lesson here.
Dee: Absolutely.
Doug: Great. Well thank you very much, Dee. Appreciate it.
If you want more tips and insight that will help you avoid risky business practices or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast. Thanks for listening to this week’s show.
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