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 the 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. I’m your host, Dave Cain. This year, the week of September 4th, is National Payroll Week, so to celebrate the occasion, our guest, Heather McNichols, Rea’s director of accounting services will discuss some tips to help businesses avoid some common payroll pitfalls. For a lot of reasons, payroll can get confusing. After all, it’s not as simple as cutting a check for your take home pay. There are a lot of things you have to consider, like how your employees are classified, how much taxes need to be withheld, and even, which rules govern how taxes will be withheld each pay. Heather will join us on this episode to talk about these concerns, offering insights into solutions that will help make your payroll process a breeze. Welcome back to unsuitable, Heather.
Heather McNichols: Thank you, Dave.
Dave: Hey. How does it feel when you’re introduced as the director of accounting services for a top 100 accounting firm?
Heather: I have to say, it feels pretty good.
Dave: Fantastic. You’re doing a great job for the firm, and a lot of progress going on with accounting services.
Heather: Thank you.
Dave: Great job. Did I also see that you’re helping out with your kid’s Cub Scout troop? Is that going to baseball games and helping out with Cub Scouts?
Heather: Yep. Now we’ve added football and soccer.
Dave: Football and soccer. Okay. Apparently, you’ve got your summer vacation in between all that stuff.
Heather: Yep.
Dave: We’re going to talk about payroll. And again, this is National Payroll Week. I’ve got to be honest. I’ve celebrated a lot of things in my career. I’m not sure I’ve celebrated National Payroll Week.
Heather: Well, you should. It’s a very important week. I think a lot of times, we forget the payroll processors and the individuals who are professionals that work on payroll, and how much they do and keep us out of trouble.
Dave: You know, I’ve got to tell you. The National Payroll Week is up against some pretty stiff competition. In fact, this Saturday, September 9th is also National Beer Lovers Day. Did you know that?
Heather: Can’t they be combined?
Dave: They could be combined. And next week is Line Dance Week, September 11th to 16th, so up against some pretty stiff competition.
Heather: That one would be hard to beat.
Dave: Are you a line dancer?
Heather: I am not, but I’m always open to learn something new.
Dave: You’re always open. Okay. We’ll get you on there. Also, did you know that under National Payroll Week, which is sponsored by the American Payroll Association, there’s a song for National Payroll Week. You didn’t know that?
Heather: I was not aware of that.
Dave: We go and cutting edge. The name of that song is America Works Because We’re Working for America. That’s the name of the song. Are you a good singer?
Heather: I am not. I’m hoping you are.
Dave: No. No. But, I wanted to just give you that as a present.
Heather: Thank you.
Dave: The words to that song.
Heather: Appreciate that.
Dave: So, that’s our gift to you. We’re on a little short budget, but that’s our gift to you.
Heather: I appreciate that. The first time I was here, I didn’t get a gift.
Dave: Well, now you are. But, that’s how important you are to the firm. You get a nice gift.
Heather: Thank you.
Dave: Let’s talk about payroll. The first thing I want to tackle is this thing that I run into a lot, and certainly a lot of our fellow colleagues do. And this is, this employee versus subcontractor issue.
Heather: Right.
Dave: Can you talk about the, in short, the rules. I know those rules are very lengthy.
Heather: Yeah. There are a lot of rules, but the IRS does break it down into kind of three main categories. One of which is: Who is in control? Who is the behavior of the job? Does the employer dictate when that person comes to work, how the job is going to be completed? Or, does the individual get to say, “This is my service and this is when I’m going to be there.” The next one is: Who controls the tools of the trade? If the company owns those tools, they’re telling you when to show up, they’re your employer and you need to be an employee. If you have your own … For example, a lot of places, like a cleaning company, if they’ve got their own sweepers and they bring in their own cleaning supplies, then they are a subcontractor, because they’re holding their own tools.
And the final one is: Who dictates the relationship? Does the company say, “This is what we’re going to pay you and you’re going to have these certain benefits.” If so, again, you’re an employee. If the individual comes in and says, “This is my price for the service,” then we’re looking at more of a subcontractor relationship.
Dave: There’s certain industries I think you see this more than others, that I guess it’s more of the tradition, or the business operation, that they are subcontractors versus employees. Certainly construction comes to mind as an industry where you see a lot of that. Maybe transportation. But, for the most part, I think you go through that test. Have you ever had a situation where the IRS has challenged the 1099 or subcontractor employee?
Heather: Absolutely. They have questioned whether this … Those exact same rules. Who dictated the time? Who owned the tools? Because, they do feel that they’re an employee and that social security and Medicare wages should’ve been … Or withholding should’ve been taken out for that individual. The other thing that’s really important to think about is, if it’s a subcontractor, they’re not covered under workers’ compensation. If it’s an employee, then they are covered underneath your policy, so you want to make sure that they have some kind of coverage.
Dave: That’s a good point. We started with the IRS, but it’s probably more of the state area with the workers’ comp, the state unemployment issues, the federal unemployment. Under an audit of the business, I think they’re looking for that. Are they not?
Heather: They are. And the Department of Job and Family Services, or State Unemployment, we conduct a lot more of those audits. They’re more frequent. The first thing they ask for is a list of 1099’s that were issued, and then they also review the checks that were written. Looking for specifically checks written to individuals.
Dave: I think when we opened up the podcast with National Payroll Week, I think it’s designed to really bring attention to how difficult payroll can be, and I think it’s taken for granted. I mean, you just hit one key issue. The subcontractor issue is very difficult. On this podcast, we talk about risk and reducing risk to business owners, and certainly this is an area where someone would look to see if they do have risk.
Heather: Right. Right. I think, often people think that payroll is just, as you mentioned at the beginning, you’re calculating the taxes and getting the net check and that’s all there is to it. And there are so many aspects of what taxes need to be withheld. If you end up with garnishments, that’s a whole nother calculation and difference of information that has to be kept. There’s just a lot of intricacies to payroll, and it’s important to know when to ask for help.
Dave: Come on. This can’t be that hard. You just put the hours times rate into the computer and it spits all the numbers, and away you go. Is it that easy?
Heather: Assuming that it has been set up properly in the beginning, yes. But, getting that set up and making sure it’s right is the trick, and that’s where a lot of people need help.
Dave: We recently heard a story where an employee was not receiving a pay stub, or did not have access to a pay stub. Does that raise a flag for you if an employee is not getting a pay stub?
Heather: Absolutely. Why are they not getting that? Is it because they don’t want them to know what’s on that pay stub? Or is it getting lost somewhere in translation?
Dave: Could be a number … Could be a red flag.
Heather: Yeah. It’s definitely a red flag.
Dave: The other item I want to dive into a little bit is this resident tax versus workplace tax. That gets really confusing. For example, I’ll use you as an example. Your home office is in New Philadelphia, Ohio. And you’re here today in Dublin, Ohio. Are you withholding tax? Now, before you answer that, the Dublin folks listen to this podcast, so be careful.
Heather: We are not, because House Bill Five came into effect for the State of Ohio, and it put a bunch of different rules on the number of days that an individual has to work in a city before they’re required to start withholding that. But, those are the kind of changes that your payroll provider has to be up on so that they know when to make those changes. They have to keep track of which days your employees are working in different cities. If they’re working in multiple cities, you have to figure out which city they worked in the longest that day. So, there are a lot of different rules when it comes to those workplaces taxes, and those are very unique to Ohio. But, still important to know.
Dave: Again, the key there is: Are you withholding the proper taxes? Are you withholding taxes, number one? And are you withholding the proper taxes?
Heather: Exactly. Another one that we run into is a school district tax, which in turn is based on the residence of the employee. But, not every school district in Ohio has a tax. But, you brought up earlier, well, I just plug it into the computer and it knows. QuickBooks, for example, is keyed to set up a school district for every employee, so we run into, a lot of times, because QuickBooks default goes to setting that up, that companies will have school district withheld on a bunch of employees that don’t even need it. So, that’s something to be aware of and watch for.
Dave: If that occurs, can you get that money refunded?
Heather: Yes, you can. But, it becomes …
Dave: It’s a bit of a hassle and a cost.
Heather: Exactly. Exactly. It’s better if you can catch it on the forefront.
Dave: You mentioned cities and school districts. What about the various states? What if I have an employee that works in multiple states, runs over to Indiana, runs to Pennsylvania?
Heather: It’s very important to talk with each of those states to find out what their specific rules are, not just on state withholding, but again, unemployment and workers’ comp. Every state has a different rule, depending on their laws. If you are moving around between states, sometimes you can be covered under your home state, sometimes you can’t. It gets very, very complicated when you start crossing state lines.
Dave: As you talk to your colleagues in the industry, and you begin to step back and compare the tax climate, the payroll tax climate in Ohio, any idea how we stack up to other states? Are we a friendly state, business friendly state for payroll reporting? Or, are you seeing other states that are much easier?
Heather: There are states that are much easier, only because they don’t have the local taxes. So, when you take that whole piece out of it, it makes things a lot less complicated. But, on the other hand, there are states that are much more complicated, so we kind of fall in the middle.
Dave: In the middle. Okay. That’s probably not what we want to hear as a resident of the State of Ohio. We want to be in the top 10, top five, of businesses … Of states to do business in. Know when to ask for help. We talked about, we kind of joked around. You put it in a computer and it’s got to be right because it’s in QuickBooks or it’s in another payroll, or we use another payroll service. But, that’s not necessarily the case.
Heather: Right. Rea & Associates, for example, has a variety of services that they can offer to help you, whether it’s training your payroll processor internally and coming in and just making sure that they’re aware of how to use the program and how to make sure that the calculations are correct. Or, we outsource payroll, so we can do your payroll for you so that the internal people aren’t even bothered with in. And in that case, you’re not worried about being there on a regular basis, or if somebody goes on vacation, or something like that, you’ve got somebody to cover you.
Dave: I just figured this out. As the director of accounting services for Rea
& Associates, you were just selling.
Heather: Yes.
Dave: You were just selling services on the podcast. I’ll have to check the fine print to see if you’re permitted to do that. We’ll get back to you on that. But again, you point out, that’s kind of an audit, kind of an internal audit that your team provides, or each business should probably do some kind of payroll audit each and every year. I think we’d be amazed at how much money slips through the cracks.
Heather: Right.
Dave: How would you go about doing a payroll audit?
Heather: You could have an outside company reviewing just time sheets against the payroll reports, to make sure that the accurate hours were reported, or you can review the payroll taxes to make sure that the proper wages were flowing through properly onto those forms.
Dave: I want to go back to the song that you don’t want to sing. That is a celebration of the National Payroll Week. But, the chorus is, America works. America works because we’re working for America. America works because we’re working for America. You could probably sing that. Can’t you?
Heather: I don’t know if I can sing it.
Dave: You can sing it. You look at that, and that’s true. There’s a tax component of our paychecks that we have to get right, and employers should get that right and do everything they can. What about these boxes you check? It’s married, and we often get the question about: Am I withholding the correct amount? And there’s the married or whatever. Zero. Single. Zero. What’s that all about? How can that keep me out of trouble?
Heather: If you choose to mark single and zero, that’s the most amount of tax that can be withheld. If you choose married and four exemptions, that’s going to withhold less tax on an individual. Often, when we do payroll, we get a lot of questions on: What should I be marking? And we always send them back to their tax advisor because there’s other things going on, on their personal tax return that we don’t know about, so we can’t always tell them what’s the best case for an employee. But, we can say, “If you mark single and zero, it’ll be more. If you mark married and two, it’s going to be less.”
Dave: You’ve probably heard in the news over the past several months that immigration and illegal aliens, that’s kind of been in the news the last several months. What if, as an employer, you’re faced with a situation of maybe, you have a current employee that’s classified, or you … That’s classified in that category, or you have someone that applies for a job. What kind of identification and information should you obtain? Is that W9 or I9?
Heather: The I9 form.
Dave: 270, or route 30. I don’t know.
Heather: Right. The I9 form is a form that every employer should have on file for every employee. It asks basic questions on it, such as, social security number, address. And then, you do have to keep with it a form of identification, a valid driver’s license, a copy of a social security card. There’s a list that comes with the form of the proper identification to have, and every employer is required to have that on file for their employees if the US Immigration would come in to audit.
Dave: So, every employer must have that on every employee.
Heather: That is accurate.
Dave: Even though you look like you’re from State of Ohio, New Philadelphia, Ohio, I still have to have a W9 for you.
Heather: Exactly. Even if you’ve known me for 30 years, you still need to have that information on file.
Dave: What if I don’t have that on file? What happens?
Heather: There can be fines and penalties if the Department of Immigration comes in for an audit, and those do happen, where they’ll just show up and want to see those forms for each of your employees currently on staff.
Dave: I think that’s a possibility in the climate that we’re in right now that, that could occur more frequently than it has in the past.
Heather: I agree. They’re going to be pushing that more and more.
Dave: As a business owner, give me two or three tips about my payroll that I need to make sure is 100% correct. What can I do to make sure that I’m going home tonight. Go to sleep. Know my payroll’s correct.
Heather: As a business owner, you want to make sure that the individuals that are doing your payroll are getting training, whether that’s if you’re outsourced. Ask them if they’re sending their individuals to training, what kind of training they’re getting. Or, if they’re internal, make sure that you’re sending them to training, so that they’re up on the most current laws and changes. The other thing is to make sure that you’re classifying your employees properly, making sure that you have employees. You’re not paying people as subcontractors that are actually employees. I would say those are the big ones, and asking for help if you need it.
Dave: If I’m using a third party provider, outside someone out of my accounting staff, again, as a business owner, how do I make sure that those taxes are being deposited correctly and on time?
Heather: Your provider should be able to give you that information on when those taxes were paid. For the IRS, for example, if you look in circular E, publication 15, it can give you all of the due dates to make sure that those are accurate.
Dave: You’d mentioned circular E. If I wanted to go to the irs.gov website, I think they have some pretty good tools that describe what you were just talking about. Very complicated, but they’re there if you want to read them.
Heather: Right. That is the first place to start looking, that website.
Dave: Okay. Another area that I think … You and I have talked about this before, that can get a business in a bit of trouble, maybe cost a penalty, would be maybe they pay a bonus at the end of the year, and it’s above the normal payroll, which triggers, maybe a higher tax liability. And maybe it’s not paid on time. Is that another area of concern for you as you consult with your clients?
Heather: Yes. If they have a liability that exceeds $100.000, they immediately have to pay those taxes the next business day. And just like you said, that bonus a lot of times throws them over that. They’re not always thinking that, that plus my last payroll are going to throw me over that amount. So, making sure that any time they issue a bonus, they’re aware of that is very important.
Dave: Good advice. Good advice. Our guest today has been Heather McNichols, director of accounting services for Rea & Associates, and she’s helping us celebrate happy National Payroll Week. Thanks again for joining us on unsuitable today. Appreciate your insight. Hope you were able to walk through and walk away with some useful insight today. And if you still want to know more about the tactics covered on today’s episode, I’m sure Heather will be more than happy to walk through your specific challenges. You can either send us an email at podcast@reacpa.com or you can contact Heather directly at heather.mcnichols@reacpa.com. Be sure to check out our website at reacpa.com for additional information on the subject. And don’t forget to subscribe to our podcast on iTunes and never miss an episode of unsuitable again. Until next time, I’m Dave Cain encouraging you to loosen up your tie and think outside the box.