COPIES OF TODAY S PRESENTATION.

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Ellen Morton
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2 COPIES OF TODAY S PRESENTATION

3 WHERE AUDITORS ARE LOOKING I R S, D O L A N D S T A T E U N E M P L O Y M E N T 1. Misclassifying workers 1. Contractors vs. Employees 2. Form 1099 vs. Form W-2 2. IRS and State Income Tax 1. Taxable vs. Non-Taxable Fringe Benefits 2. Accountable Qualified Plans D E P A R T M E N T O F L A B O R 1. Exempt vs. Non-Exempt Employees 1. Leave policy errors 2. Overtime errors 2. Garnishments 1. Priority 2. Limits 3. Multiple orders

4 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?

6 Employee or Independent Contractor Paid thru Payroll Common Law Employee Statutory Employee Agent-drivers, commission-drivers, full-time life insurance agents, industrial homeworkers Paid thru Accounts Payable Statutory Non-Employee Direct sellers, real-estate agents Independent Contractors WB-1 6

7 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

8 Who Needs to Collect the Data Who are we paying? Purchasing and Accounts Payable Independent Contractor Payroll and Human Resources Employee US Person W-9 and 1099, 945 Non US Person W-8 or 8233 and 1042-S and 1042 US Person or Non US Person W-4, W-2 and 941 8

9 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

10 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

11 CONTRACTOR VS. EMPLOYEE RECORDKEEPING WB: 7-9 AND C O N T R A C T O R ( P G S 7-9) E M P L O Y E E ( P G S 1 0, 1 1 ) 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 I-9 W-4 New hire reporting Job description Payroll records

12 INVALID W-4 WB-10 xxxxxx

13 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

15 THREE TYPES OF DEDUCTIONS WB-12 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.)

16 COURT ORDER PRIORITY WB 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

17 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. Kansas and Missouri are the same as federal. IRS Levy based on take home pay Calculation based on 668-W and employee actual income tax deductions

18 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

19 Federal Law Limits Garnishments Creditor 25% of disposable or 30 times federal minimum wage from disposable (as of 7/24/09 = $ per week) Missouri is 10% of disposable if employee is designated as head of family by the court. Otherwise same as federal.

20 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 (only if a medical insurance child support order) Equals IRS Levy Amount

21 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

22 ILLUSTRATION OF DISPOSABLE PAY FOR GENERAL GARNISHMENT - MO Withholdings: FITW $75.00 FICA $38.25 State W/H $20.00 Medical Ins $ (k) $50.00 Disposable Pay: Gross $ Taxes (133.25) Disp. Pay $ x $7.25 (217.50) $ Limit 25% $91.69 Limit 10% $36.68

23 ILLUSTRATION OF DISPOSABLE PAY FOR GENERAL GARNISHMENT - IL Withholdings: FITW $75.00 FICA $38.25 State W/H $20.00 Medical Ins $ (k) $50.00 Disposable Pay: Gross $ Taxes (133.25) Disp. Pay $ x $7.25 (326.25) $ Limit 25% $91.69 Limit 15% $55.01 Limit 10% $36.68

24 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% $ Limit 60% $187.05

25 PRO-RATION FORMULA Employee Owes: Limit = $ st - $ = 28.5% 2 nd - $ = 28.5% 3 rd - $ = 43% 28.5% = $ % = % = Total $ Total $155.88

27 BASICS OF FAIR LABOR STANDARDS ACT (FLSA) I N C L U D E D I N F L S A Exempt vs. Nonexempt Guaranteed Minimum Salary - Exempt Minimum Wage (states may set a higher rate) - Nonexempt Overtime requirements Recordkeeping requirements Child Labor Laws 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 Paid holidays WB-15

28 EXEMPT CLASSIFICATIONS WB-16 Federal Salary Requirements - currently $455 per week guaranteed or Highly compensated - $100K per year must include guaranteed salary of at least $455 and meet all job duties requirements Categories: Executive (pg 16) Professional some are paid on a fee basis (pg 17-18) Highly Skilled Computer Professionals may be paid hourly or salaried (pg 19) Adminstrative (pgs 20-21) Outside Sales no salary requirement (pg 25)

29 NEW FEDERAL LAW CHANGES Change weekly guaranteed salary to: $913 per week (approx. $47,476 per year) Highly compensated $134,004 per year must still meet all weekly pay requirements and job duty requirements Every three years will update threshold Strengthens overtime protection for salaried nonexempt Provides better clarity for workers and employees Effective date December 1, 2016

30 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

31 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

32 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 Computer programmers, designers of computers and system analysts Does not include: computer operators, repairpersons, technicians, data entry or help desks

33 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

34 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

35 50% RULE PRIMARY DUTY TEST No more than 50% 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

36 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)

37 IN OTHER WORDS. Exempt employees get paid no matter what! We cannot tell an exempt employee they must work a specific number of hours! Your leave policies can make an exempt employee look like a non-exempt!

38 EXCEPTIONS TO THE RULE If the employee is absent for a whole day or a whole workweek and the company has a sick and/or vacation leave policy and the employee has no leave left on the books or The company has a no leave policy Week of hire, week of termination Suspension for a violation of a serious workplace conduct rule FMLA intermittent unpaid leave Government agencies do not have to follow any of these rules as long as they have a written policy that exempts them. (page 24)

39 EXCEPTIONS TO THE EXCEPTIONS AND SO ON.. Special Concerns (page 22): If the company closes for an entire designated workweek dock or use vacation or PTO if they want to be paid Jury Duty cannot dock or force them to use vacation or PTO Holidays cannot dock or force them to use vacation or PTO Can An Exempt Employee Receive Comp Time (page 23) Comp time or flex time is allowed Extra compensation for extra work done is allowed

40 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

41 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

42 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 = $ $ $ = $900.03

43 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.

44 FEDERAL MEAL/REST BREAK RULES WB 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

45 LECTURES, MEETINGS AND TRAINING PROGRAMS 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.

46 PIECEWORK PAY WB Scott works 50 hours during a particular workweek, producing 150 units. His hourly pay is $14.20 and he receives an additional $2 for each unit produced in excess of 100 during each pay period. What is the basis for Scott s overtime of 150% of his regular rate? 1. $14.20 x 50 = $ $100 = $ $ = $ $16.20 x.5 x 10 = $ $ $81.00 = $891.00

47 NON-DISCRETIONARY VS. DISCRETIONARY PAY Non-Discretionary Promise made to an individual employee for individual personal performance (e.g. attendance bonus, commissions, on-call pay, call back pay, etc.) Discretionary No promise made Based on other people s performance Example: Yearly bonus, referral bonus, holiday pay, sick pay, etc.

48 EXAMPLE: NON-DISCRETIONARY PAY FOR HOURLY EMPLOYEES Ed worked 46 hours last week. Ed has an hourly rate of $ Ed also received $75 for being on-call for the weekend. The 46 hours includes time worked for a response to being called in x $10 = $460 + $75 = $ $535 divided by 46 = $ $11.63 x.5 x 6 = $ $535 + $34.89 = $569.89

49 OVERTIME PAY FOR SALARIED NON-EXEMPT EMPLOYEES W/BONUS Salaried employee works 48 hours one workweek and receives a non-discretionary bonus of $100.00: 1. $2,000 x 12 = $24, $24, = $ $ $ = $ $ = $ $11.70 x.5 x 8 = $ $ $46.80 = $608.33

50 Weighted Average Overtime Calculations 26 $10.00 = $ $10.50 = $ $ = $10.21 $10.21 x.5 x 6 = $30.63 $ = $500.63

51 COMP TIME FOR NON-EXEMPT EMPLOYEES Private entities Same week it s worked, or Same pay period at time and a half WB 31 Public entities Up to 240 hours for non-emergency personnel Up to 480 hours for emergency personnel Must be banked at time and a half No use it or lose it policy allowed

52 TEST YOUR KNOWLEDGE ANSWERS WB False this is a discipline problem for HR. 2. False even salaried non-exempts must keep a time record and be paid overtime 3. True except where a state law overrides the tip credit amount minutes

54 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

55 WITHHOLDING METHODS WB Regular Wages Regular paycheck with no extras on it Use the Wage-bracket method (W4) Supplemental Wages Definition: Anything other than normal paycheck (overtime, sick pay, prizes, commissions, bonuses, etc) Regular Supplemental use W-4 Lump Sum Supplemental Percentage method (flat-rate percent of 25%) Aggregate/Cumulative method

56 SAMPLE AGGREGATE/CUMULATIVE METHOD Example 1 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:

57 SAMPLE AGGREGATE/CUMULATIVE METHOD Example 1 (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

58 SAMPLE PERCENTAGE METHOD Example 2 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

59 GROSS UP EXAMPLE Net pay is $500 Federal flat rate 25% State flat rate 4.25% (example only) FICA and Medicare 6.2% % = 7.65% = 63.10% $500 / 63.10% = $792.39

60 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 54 (Jan. 1, 2016) De Minimis up to $75.00** Most Allowances are taxable

61 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

62 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

63 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

64 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

65 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

66 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 2016 exclusion from wages: $255 per month for combined commuter highway vehicle transportation and transit passes $255 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

67 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

68 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

69 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)

70 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

71 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.

EXEMPT VS. NON-EXEMPT Identifying Employee Classification

EXEMPT VS. NON-EXEMPT Identifying Employee Classification Employee Classification Keeping it all straight The comptroller of a small company notices that her accounting clerk works a lot of overtime. In