WHERE AUDITORS ARE LOOKING

Transcription

1 WHERE AUDITORS ARE LOOKING I R S A N D S T A T E U N E M P L O Y M E N T 1. Misclassifying workers MISC Forms 2. Form W-2 2. Taxable vs. Non-Taxable Fringe Benefits D E P A R T M E N T O F L A B O R 1. Exempt vs. Non-Exempt Employees 1. Overtime errors 2. Garnishments 1

2 AUDIT TOOLS Company Tools Employee Handbook what the law says Payroll Policies and Procedure Manual how the law works Job Descriptions overtime or not? Contractor or employee? HELPFUL WEBSITES

3 EMPLOYEE OR CONTRACTOR? WB-1 Type Worker FITW FICA SITW FUTA SUTA Common Law Employee Statutory Employee Statutory Nonemployee Contractor X X X X X X X X 3

4 IRS TEST VS. ABC TEST WB PAGES 2-5 IRS Test (pgs. 2-3) ABC Test (pgs. 4 5) Behavioral control Financial control Relationship of the parties Absence of control Business is unusual or away Customarily doing business as an independent contractor IRS SECTION 530 SAFE HARBOR WB - 6 Result of previous IRS audit IRS ruling use of form SS-8 Industry-wide practice of long standing 4

5 CONTRACTOR VS. EMPLOYEE RECORDKEEPING WB: 7-9 AND C O N T R A C T O R ( P G S 7-9) Contract or PO W-9 (Form 8832 for LLC filing as Corp.), or W-8 (foreign vendors) Proof of bona-fide business Invoices 1099-MISC (if applicable) or 1042-S E M P L O Y E E ( P G S 1 0, 1 1 ) I-9 W-4 New hire reporting SS# verification Job description Payroll records INVALID W-4 WB-10 xxxxxx 321 Any Street 5

6 VALID W-4 Jane S. Smith Jan. 15, 2015 VALID W-4 Jane S. Smith Jan. 15,

7 SSN MATCHING E-VERIFY WB-11 Social Security Number verification is suggested for all new hires after they are hired and before they are scheduled to work Business Services On-Line tab E-verify tab 7

8 THREE TYPES OF DEDUCTIONS Mandated Statutory taxes Railroad retirement contributions State mandated disability and retirement contributions Involuntary Garnishments Voluntary Health insurance, S-T-D and L-T-D, union dues, 401(k), etc.) WB-12 COURT ORDER PRIORITY 1. Bankruptcy (unless Support Order or IRS levy is served first) 2. Support Order 3. IRS Tax Levy 4. Federal Student Loan (AWG) 5. Federal Non-tax debt (AWG) 6. State Tax Levy 7. State Student Loan 8. State Non-tax debt 9. Local Tax Levy 10. Creditors WB-13 8

9 FEDERAL LAW LIMITS GARNISHMENTS Bankruptcy No limit Support based on disposable pay 50% if there is a second family, 60% if there is not a second family and 5% additional for arrearage. Once a child support is taking 25% of more of disposable you cannot honor a creditor or student loan. CA is 50% of disposable IRS Levy based on take home pay Calculation based on 668-W and employee actual income tax deductions FEDERAL LAW LIMITS GARNISHMENTS Student Loans and non-tax debt based on disposable 15% - Federal (AWG) 10% - State only State and Local Tax Levies 25% of disposable or read the order 9

10 Federal Law Limits Garnishments Creditor 25% of disposable or 30 times federal minimum wage from disposable (as of 7/24/09 = $ per week) Many states set their own limits. CA is the same as federal HOW THE CALCULATIONS WORK T A K E H O M E P A Y ( I R S ) Gross minus: Taxes Existing voluntary deductions Child supports Equals Take Home Pay Less: 668-W Chart (this becomes the net pay) D I S P O S A B L E P A Y ( A L L O T H E R G A R N I S H M E N T S ) Gross minus: Taxes Medical insurance premium (if a medical insurance child support order) Equals IRS Levy Amount 10

11 TAKE HOME PAY CALCULATION Gross: $ Less: ( 85.00) FICA/Fed With ( 15.00) State Withholding ( 45.00) Medical Ins. ( 25.00) 401(k) THP: $ Less: (275.94) 668-W Chart Levy Amt: $ Amt. to deduct from wages Illustration Of Disposable Pay For General Garnishment*** Employee earns $500 per week Withholdings: Disposable Pay/Earnings: FITW $75.00 Gross Pay $ FICA $38.25 Taxes (133.25) State W/H $20.00 Disp. Pay $ Medical Ins $55.00 (30 x $7.25) (217.50) 401(k) $50.00 $ Limit (25%) $91.69 Limit (10%) $

12 ILLUSTRATION OF DISPOSABLE PAY FOR CHILD SUPPORT MEDICAL SUPPORT Withholdings: FITW $75.00 FICA $38.25 State W/H $20.00 Medical Ins $ (k) $50.00 Disposable Pay: Gross $ Taxes (133.25) Medical Ins ( 55.00) Disp. Pay $ Limit 50% $ PRO-RATION FORMULA Employee Owes: Limit = $ st - $ = 28.5% 2 nd - $ = 28.5% 3 rd - $ = 43% 28.5% = $ % = % = Total $ Total $

13 BASICS OF FAIR LABOR STANDARDS ACT (FLSA) WB-15 I N C L U D E D I N F L S A Minimum Wage (states may set a higher rate) Overtime requirements Recordkeeping requirements Child Labor Laws Equal Pay E X C L U D E D F R O M F L S A ( M A Y B E S E T B Y S T A T E L A W ) Paid benefits (e.g. vacation, sick, personal time off) Breaks lunch and rest Frequency of pay Restrictions for children workers 13

14 EXEMPT CLASSIFICATIONS Federal Salary Requirements $455 per week guaranteed WB-16 Categories: Executive (pg 16) Administrative (pg 20-21) Professional some are paid on a fee basis (pg 17-18) Highly Skilled Computer Professionals may be paid hourly or salaried (pg 19) Outside Sales no salary requirement (pg 25) California Exempt Salary Criteria Must be paid two times state minimum wage based on 40 hours no reduction allowed for part-time exempt Must have guaranteed monthly salary (Currently $3120 approx. $720 per week. Jan 1, $ approx. $ per week) Pharmacists and registered nurses are not eligible for professional exemption 14

15 PURPOSED FEDERAL LAW CHANGES Change weekly guaranteed salary to: $50,440 per year $970 per week Federal Register 80 FR ( Effective date sometime after the beginning of Exact date unknown at this time. Impact on California will supersede CA law EXECUTIVE EXEMPT REQUIREMENTS WB-16 Run a recognized portion of the company Ability to hire, terminate, change policy, set budgets, make decisions, etc. Supervise 2 or more full-time persons or the equivalent of 15

16 PROFESSIONAL EXEMPT REQUIREMENTS WB-17 & 18 Learned Professional (WB 17) Advanced knowledge in a recognized professional field Impart knowledge Use discretionary judgment Creative-Artistic Professional (WB 18) Use of creative and artistic abilities Cannot be told how to create the work HIGHLY SKILLED IN A COMPUTER-RELATED OCCUPATION WB-19 Pay Option Salary (at least $455 per week) or Hourly rate of $27.63 an hour California Pay Option: Hourly rate $41.27 (effective 1/1/15) Salary no less than $85, annually or $7, per month (see Computer programmers, designers of computers and system analysts Does not include: computer operators, repairpersons, technicians, data entry or help desks 16

17 ADMINISTRATIVE EXEMPT REQUIREMENTS WB Office or non-manual work pertaining to general business operations. Work of substantial importance with higher learning or experience. Limited powers of responsibility, authority and influence. Must report directly to another exempt employee EXAMPLE OF ORGANIZATIONAL CHART Director of Accounting Executive Exempt Controller Professional Exempt Executive Secretary Non-exempt Accounts Receivable Mgr Admin. Exempt Accounts Payable Mgr. Admin. Exempt Payroll Mgr. Admin. Exempt A/R Clerk Non-Exempt A/P Clerk Non-Exempt Payroll Clerk Non-Exempt 17

18 50% RULE No more than 50% (20% if governmental agency) of any workweek can be spent doing non-exempt type work. Clerical, manual labor Routine, repetitive, directed-type work What you pay a non-exempt employee to do EXEMPT EMPLOYEE PAY REQUIREMENT WB 22, 23, 24 An exempt employee must receive the same amount of pay per workweek regardless of the number of hours they work or the quality of their work ( 29 CFR and.602) 18

19 APPLICATION OF PRINCIPLES TO ESTABLISH PHYSICAL HOURS WORKED WB 26 Minimum wage requirement Overtime requirement for hours physically worked over 40 in a workweek Requirement to keep an accurate time record Meal/Rest Break Rules Suffered or permitted rules SALARIED NON-EXEMPT PURPLE SQUIRREL WB-27 Can be paid fixed or fluctuating Pay fixed when: employee s schedule is a fixed schedule and rarely has overtime Pay fluctuating when: employee s schedule will always fluctuate and almost always has overtime but you never know how much Must keep a time record 19

20 SALARIED FIXED CALCULATION Jim works 48 hours one workweek. His salary is $3000 per month $3000 x 12 = $36,000 $36, = $ $ = $17.31 $17.31 x 1.5 x 8 = $ $ $ = $ SALARIED FLUCTUATING CALCULATION Jim works 48 hours one workweek. His salary is $3000 per month $3000 x 12 = $36,000 $36, = $ $ = $14.42 $14.42 x.5 x 8 = $57.68 $ $57.68 = $ Must be stated in the job description and employee must sign an agreement to be paid this way. 20

21 SALARIED FLUCTUATING CALCULATION Jim works 48 hours one workweek. His salary is $3000 per month $3000 x 12 = $36,000 $36, = $ $ = $14.42 $14.42 x.5 x 8 = $57.68 $ $57.68 = $ Must be stated in the job description and employee must sign an agreement to be paid this way. NON-EXEMPT BASICS WB-PAGE Minimum wage requirement California minimum wage increase to $9.00 on July 1, Effective January 1, 2016 minimum wage will increase to $10.00 Meal/Rest Break Rules Suffered or permitted rules 21

22 PAID SICK LEAVE LAW (AB 1522) Eligibility 30 days employment within a year 90-day accrual period before first use Earns 1 hour for every 30 hours worked (24 hours per year) Applies to all employees (including part-time and seasonal) Can be part of a PTO policy California Basic Overtime Law Any hours over eight to be paid at time-and-ahalf Any hours over 12 to be paid at double time Seventh-day premium pay the first eight hours worked on the seventh day of work in any one workweek; double time for any work in excess of eight on any seventh day of the workweek (Does not apply if employee did not work entire week) 22

23 Alternative Workweek Rules Secret ballot vote 2/3 majority Submitted and approved by DLSE No coercion allowed Maximum 10-hour days (exception: hospitals, residential care industry) Regularly scheduled workweek required FEDERAL MEAL/REST BREAK RULES If the employee is offered a meal break they must have 30 minutes uninterrupted as unpaid. If they get interrupted during the 30 minutes, they must be paid for the whole 30 minutes. If the employee is offered a rest break all rest breaks of 20 minutes or less must be paid rest breaks 23

24 California Meal/Rest Break Rules An unpaid 30-minute meal break must be provided to employees who work over five hours. However, if work time is less than 6 hours, the employee may voluntarily waive the break time. Employees must be given a paid 10-minute work break every three and a half hours. 7 day premium rule applies for maximum hours worked. Make-Up Time Must be requested by employee in writing in advance (each occurrence) Time must be made up in same workweek it is requested off Employee may work up to 11 hours in one day or 40 in a workweek without overtime Employer cannot encourage or solicit make-up time 24

25 LECTURES, MEETINGS AND TRAINING PROGRAMS WB Not counted as working time (must meet all four requirements) 1. Attendance is outside the employee s regular working hours 2. Attendance is voluntary 3. The course, lecture or meeting is not directly related to the employee s current job. 4. The employee does not perform any productive work during such attendance. 25

26 PRIZES, AWARDS, GIFTS AND BONUSES WB Cash taxable Gift Certificates taxable Tangible Property nontaxable if de minimis Achievement Awards (page 39) Safety or Length of Service (5 year increments only) Tangible property only Up to $1600 non-taxable if qualified plan Up to $400 non-taxable if non-qualified plan WITHHOLDING METHODS WB 36 Regular Wages Wage-bracket method Supplemental Wages Anything other than normal paycheck (overtime, sick pay, prizes, commissions, bonuses, etc) Percentage method (flat-rate percent of 25%) Aggregate/Cumulative method 26

27 SAMPLE CUMULATIVE METHOD Example 1 You pay John Peters a base salary on the 1 st of each month. He is single and claims one withholding allowance. In January he is paid $1,000. Using the wage bracket tables, you withhold $51 from this amount. In February he receives compensation of $1,000 plus overtime of $450.00, which you combine with regular wages and do not separately identify. You figure the withholding based on the total of $1, SAMPLE AGGREGATE/CUMULATIVE METHOD Example 2 You pay Sharon a base salary on the 1 st of each month. She is single and claims 1 allowance. Her May 1 pay is $2,000. Using the wage bracket method you withhold $190 according to tables. On May 14 she receives an annual bonus of $1,000. Using the aggregate/cumulative method you withhold as follows: 27

28 SAMPLE AGGREGATE/CUMULATIVE METHOD Example 2 (continued) 1. Add the bonus amount to the amount of wages from the most recent base salary pay date ($2,000 + $1,000 = $3,000) 2. Determine the amount of withholding on the combined $3,000 using the wage bracket tables ($340.00) 3. Subtract the amount withheld from wages on the most recent base salary pay date ($340 - $190 = $150) 4. Withhold $150 from bonus payment SAMPLE PERCENTAGE METHOD Example 3 Using the same facts as Example 2, you withhold using the percentage (flat rate) method. You would withhold 25% of $1,000 e.g. $250 from bonus payment 28

29 GROSS UP EXAMPLE Net pay is $500 Federal flat rate 25% State flat rate 5% (example only) FICA and Medicare 6.2% % = 7.65% = 62.35% $500 / 62.35% = $ NON-TAXABLE EMPLOYEE EXPENSE REIMBURSEMENT ACCOUNTABLE PLAN WB-38 Accountable expenses Must have receipt Show business connection Non-Accountable expenses Per Diem Allowance varies from city to city see pub Mileage reimbursement up to 57.5 (Jan. 1, 2015) De Minimis up to $75.00** Most Allowances are taxable 29

30 ACA AFFORDABLE CARE ACT Small Employers Fewer than 50 full-time employees or equivalent Can purchase health insurance through the Small Business Health Options Program (SHOP) You may required to report insurance information on employee s 2015 W-2 s Effective 2015 if self-insured must file an annual return reporting certain information for each employee covered. May be eligible for Small Business Health Care Tax Credit 59 ACA AFFORDABLE CARE ACT Large Employers 50 or more full-time employees or equivalent Must either offer minimum essential coverage that is affordable and that provides minimum value to their fulltime employees (and their dependents), or potentially make an employer shared responsibility payment to the IRS. Will be required to report insurance information on employee s W-2 s box 12 code DD Full-Time employees defined as an employee employed on average at least 30 hours of service per week, or 130 hours of service per month 60 30

31 Tuition Expense Reimbursement Pub 970 (updated 1/19/2011) Up to $5,250 per year Does not have to be work-related Graduate or Under-graduate level To be used for: tuition, fees, books and other similar expenses If considered working condition fringe unlimited amount No-Additional-Cost Service Services offered for sale to customers in ordinary course of business of the employer in which the employee is performing services Employer incurs no substantial additional cost in providing service to the employee Take lost revenue into consideration when determining whether substantial additional cost is incurred 31

32 Qualified Employee Discounts Discount given to employees on qualified property that does not exceed profit margin, or on qualified services that do not exceed 20% of the price offered to customers Qualified property or services - personal property or services provided to customers in the ordinary course of business Does not include real property or personal property held for investment Employee includes current and former employees who left because of retirement or disability, and their widow(er)s, spouses, and dependent children Company discounts must be followed if the employee is highly compensated (see Notice , I.R.B. 966) Qualified employee discounts must be provided on a nondiscriminatory basis Working Condition Fringe Property or service provided to an employee to the extent that, if the employee paid the expense, it would be deductable under IRC Sec. 162 or 167 The term employee includes a current employee, partner who performs services, director, or independent contractor 32

33 Club Dues Special rule for club dues disallows a business deduction for membership dues paid to a club organized for business, pleasure, recreation, or other social purposes: Country clubs Golf and athletic clubs Airline clubs Hotel clubs Clubs operated to provide meals under circumstances that are not conducive to business discussion Qualified Transportation Fringe Only employees: The definition of employees in this context does not include partners, independent contractors, or 2% shareholders of an S corporation Transportation in a commuter highway vehicle between the employee s residence and place of employment Transit pass, voucher, token, fare card, or reimbursement for them by the employer Qualified parking 2015 exclusion from wages: $130 per month for combined commuter highway vehicle transportation and transit passes $250 per month for qualified parking Benefits more than the limit: If the value of a benefit for any month is more than its limit, include in the employee s wages the amount over the limit minus any amount the employee paid for the benefit 33

34 Qualified Moving Expense Reimbursement Expenses that would be deductible under IRC Sec. 217 if incurred by the individual Must meet time and distance tests Cost of moving personal belongings and traveling to new location only; no meals and temporary lodging Brokerage fees, property taxes, insurance, etc., are taxable wages EMPLOYEE LOANS PAGE 41 Loans in the amount of $10,000 or more without interest charged at applicable federal interest rate difference in rate is taxable Subject to FICA/Medicare and unemployment taxes Not subject to federal or state income tax Forgiven loans are fully taxable 34

35 MILITARY PAY PAGE 42 Supplemental Military Pay Compensation paid to employees while on military duty that represents the difference between employee s regular pay and the pay provided by the state or federal government. Temporary assignment FITW, FICA, Medicare and unemployment taxes Indefinite assignment MISC (over $600) DEPOSIT AND REMITTANCE LOG EXAMPLE Pay Period Total Wages FED With EE FICA State With Local With ER FICA Total Remittance for Federal Date of Remittance FUTA SUTA Comments Transposed numbers on deposit. Corrected on 1/15 75, , , , , , /16 2, /16 1/31 76, , , , , , /1 2, /15 73, , , , , , /16 2, /28 76, , , , , , /1 2, /15 72, , , , , , /16 2, /31 74, , , , , , /2 2, Totals $448, $107, $34, $17, $4, $34, $176, $13, $4, Date of Remittance 4/5 4/5 35

36 Seminar Disclaimer This seminar is from an auditor s point of view. It is possible your company attorney may disagree with our interpretation. That is okay. It does not mean we are right or that we have given you wrong information. You may have an exception to the rule that your attorney knows about. IRS CIRCULAR 230 Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency. 36