2. Are you using a timekeeping system?
3. Are you required to include independent contractors in your New Hire Reporting?
4. Are your workers classified properly? For example, exempt vs non-exempt or employee vs independent contractor?
5. Have you ever paid an IRS or State penalty based on employment taxes?
6. Have you ever had an unemployment claim held up against your firm that you thought should not have been?
7. Do you have signed agreements with your employees for all non-legally mandated employee deductions?
8. Do you have internal control procedures in place for the payroll area to prevent embezzlement, fraud, and theft?
1) How do you prefer to pay your employees?
Cash is a legal way to pay employees in all the States. But you have to obtain the cash and keep it safe and secure on the premises to be able to pay it out. The records for cash payments are the employee’s individual signatures and they must be kept safe for a number of years to prove payroll was actually paid.
The advantages to checks include greater safety of the funds and reduced risk of theft or loss of funds. Technically only the employee can cash the check and if it is lost or stolen it can be replaced at little or no cost to the employer. There is a traceable and verifiable payment of wages, unlike cash. However, check fraud is also one of the largest categories of crime in the United States. Every check you write and sign can be used for fraud. If you use checks you need to make sure that you use a positive pay system at your financial institution to substantially reduce the chance of fraud. See below for an excerpt, from our CEO’s newest book, on Positive Pay:
“So how do you stop check fraud? The first way is to have positive pay. This is where you give your bank the information on the checks you issue. We send a file every day to each of our banks detailing the checks that were issued that day for our clients. When a check is either presented to be cashed, or is deposited and presented to one of our banks, the bank runs the information against the positive pay file. They can check the date, the amount, and the payee and if it has ever cleared before. If it does not match the file as a good item the bank notifies us and we have the ability to release or refuse the check. If we don’t respond to the bank the default action for the bank is to return the item if it is not on the positive pay file or has been presented before.”
Direct deposit is safe, confidential, convenient, and fast. Employees who use direct deposit can access their pay in their accounts at their financial institution’s opening of business on payday. Problems with direct deposit are very rare. If a problem does occur, it is generally easy to resolve. Direct Deposit is preferable to payroll debit cards in that it can’t be lost, lower costs, and more flexibility for employer and employee.
Payroll debit cards are an adjunct to a direct deposit system. They can be used in concert with your direct deposit system for your unbanked employees. Or for partial payments to family members in college, out of state, out of the country, etc.
The same information the employer uses for direct deposit (ABA and account numbers) are used for debit cards. You just send the file to your bank or your payroll service provider and they do the rest.
Your unbanked employees receive most of the advantages of direct deposit.
A properly designed payroll debit card program does not cost the employee anything as long as they follow a few simple rules. Under almost any circumstances it is cheaper than the cost of cashing a check if they don’t have a bank account. Your employees can even, for a small fee, get additional cards. In addition, it brings them into the Internet age allowing them a way to make online purchases. Pay cards also should not cost the employer anything.
Pay cards provide employees with greater security. The card should be a PIN-based card. As long as the employee does not write the PIN on the card it is worthless if lost or stolen. A lost card can be replaced with a new card, for a small fee, with the existing balance already on it. The employee usually pays a small fee for the replacement card.
It provides the employer with greater security. No checks to be used for a check fraud scheme. No checks to be lost or stolen. Not having to deliver a paycheck, provides the advantages of direct deposit to the employee and employer with no additional costs. The card should have a VISA or MasterCard logo on it to make it useable almost anywhere.
2) Are you using a timekeeping system?
Are you are solely relying on the staff to be both conscientious and honest? They should fill in the timesheet when they come and go. Trying to fill it in at the end of the week is an exercise in futility. Can you remember the exact time you left and came back from lunch on Monday when you fill out your timesheet on Friday? I can’t.
Five minutes here and there, no big deal, right? Five minutes a day for 250 working days is over twenty hours a year. That is several hundred dollars at a minimum that the employer is giving away, unknowingly. It also encourages less honorable employees to fudge their time even more, because they get away with it. It encourages other employees to do the same thing because they see their fellow workers doing it and prospering from it. Timesheets have all the weaknesses of time clocks and more, and few of the advantages
Though not a clock itself employers have kept time on paper for many centuries. It works if everyone is honest, detail-oriented and accurate. But it is subject to the potential for all kinds of fraud and errors. It also has to be kept up with. Handled by hand everywhere it goes and is stored. It is subject to physical damage and destruction as well.
Manual Punch Time Clocks
This is the classic time clock that we see punched inside of factories in old movies. The time clock stamps the time on a paper card in a sequential fashion from the first punch of the week (or other period) till the last punch of the week.
Many times, the procedure is overseen by a foreman or other company employee. This is to make sure that everyone punches in/out and nobody punches an additional card for another employee who is not present. That is called buddy punching.
The cards are collected at the end of the week and turned over to the payroll department. All of the time is then calculated by hand by subtracting the in-punches from the out-punches.
Network – Electronic Time Clocks – Mobile
Electronic time clocks are newer and more efficient. There are a number of different types of electronic time clocks. Some use a plastic card like a credit card with a magnetic stripe that identifies when he swipes his card to punch in and out. There are others where the employee punches in his assigned number to punch in and out. There are those that are just software on a computer network where the employee enters a password to punch in and out. For those that have employees who are on the move, for example, movers or carpet cleaning, there are mobile clocks that allow the employees to clock in and out when they arrive to a job site, mobile clocks have GPS and geofencing parameters. You are in control of how close the employee needs to be to the job site before they can clock in.
The upside of these is that most are connected to a computer and the punches are automatically subtracted out and then added to get a total for the pay period. That information is used to calculate pay. Many times, they are actually connected to the payroll system so the hours do not have to be re-entered into the payroll system. The hours are uploaded to the payroll system. All this saves time and errors of manual processing.
These systems do not prevent buddy punching, however. A worker can give his card or password to a friend to punch them in or out. A staff member can leave early and give his card or password to a friend to punch them out even though they may have gone to a ballgame or the beach.
Biometric Time Clocks
Biometric is the latest thing in time clocks. These clocks use the staff members own body in one way or another to institute the time punch. They vary and can use hand geometry, voice, facial recognition, iris, or other unique characteristics of the staff member that cannot be duplicated or shared. This eliminates buddy punching, completely. You can also have biometric capabilities in a mobile system as well, with fingerprint or facial recognition.
Additional resource: Avoid these 5 Timekeeping Fails (Article by GetPayroll CEO Charles Read)
3) Are you required to include independent contractors in your New Hire Reporting?
Payments to be made to Independent Contractors who perform services for a business constitute property that is subject to a Child Support Withholding Order. In numerous States, employers are required to report independent contractors as new hires, under the New Hire Reporting System and are subject to penalties for not doing so, which may be the entire amount not withheld, plus penalties and interest. To check your state requirements on reporting Independent Contractors as New Hires Click Here
We also recommend that you check this part of your year-end checklist every year to make sure the rules have not been changed on you. We expect that sooner or later every State will make Independent Contractor reporting for New Hire Reporting mandates, this will help reduce non-custodial parents evading paying legal child support orders.
4) Are your workers classified properly? For example, exempt vs non-exempt or employee vs independent contractor.
*Side Note: The US Department of Labor estimates that 70 % of US employers classify incorrectly!
Employees versus Independent Contractors
What is an independent contractor, you ask? There is no good answer.
Under IRS rules and common-law doctrine, independent contractors control the manner and means by which contracted services, products, or results are achieved. The more control a company exercises over how, when, where, and by whom work is performed, the more likely the workers are employees, not independent contractors. A worker does not have to meet all of the following 20 common law factors to qualify as an employee or independent contractor. No single factor is decisive in determining a worker’s status. The individual circumstances of each case determine the weight IRS assigns different factors.
The 20 factors used to evaluate right to control and the validity of independent contractor classifications include:
- Level of instruction. If the company directs when, where, and how work is done, this control indicates a possible employment relationship.
- Amount of training. Requesting workers to undergo company-provided training suggests an employment relationship since the company is directing the methods by which work is accomplished.
- Degree of business integration. Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.
- Extent of personal services. Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.
- Control of assistants. If a company hires, supervises, and pays a worker’s assistants, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising, and paying helpers, this arrangement suggests an independent contractor relationship.
- Continuity of relationship. A continuous relationship between a company and a worker indicates a possible employment relationship. However, an independent 1 contractor arrangement can involve an ongoing relationship for multiple, sequential projects.
- Flexibility of schedule. People whose hours or days of work are dictated by a company are apt to qualify as its employees.
- Demands for full-time work. Full-time work gives a company control over most of a person’s time, which supports a finding of an employment relationship.
- Need for on-site services. Requiring someone to work on company premises— particularly if the work can be performed elsewhere—indicates a possible employment relationship.
- Sequence of work. If a company requires work to be performed in specific order or sequence, this control suggests an employment relationship.
- Requirements for reports. If a worker regularly must provide written or oral reports on the status of a project, this arrangement indicates a possible employment relationship.
- Method of payment. Hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.
- Payment of business or travel expenses. Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.
- Provision of tools and materials. Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.
- Investment in facilities. Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.
- Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work generally are employees.
- Work for multiple companies. People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.
- Availability to the public. If a worker regularly makes services available to the general public, this supports an independent contractor determination.
- Control over-discharge. A company’s unilateral right to discharge a worker suggests an employment relationship. In contrast, a company’s ability to terminate independent contractor relationships generally depends on contract terms.
- Right of termination. Most employees unilaterally can terminate their work for a company without liability. Independent contractors cannot terminate services without liability, except as allowed under their contracts.
Employers uncertain about how to classify a worker can request an IRS determination by filing Form SS-8, “Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” However, it is likely that the IRS will classifies the worker as an employee whenever their status is not clear-cut. In addition, employers that request an IRS determination lose certain protections against liability for misclassification.
Since 1987 the IRS has been refining and trying to implement a system that is easier to make determination with than the twenty common law rules above. More recently, the IRS has identified three types of conditions could be used in determining the status of a worker as an independent contractor or an employee, those are
- Behavioral control;
- Financial control; and
- Relationship of the parties.
In general, the following is true. Individuals who offer the services they perform in the course of their professional to the general public are normally independent contractors.
So if you are tempted by the financial gains of classifying workers as independent contractors instead of as employees beware. Just one disgruntled ex-“Independent contractor” can sink your business.
Department of Labor
On January 6, 2021, the Department of Labor (Department) announced a final rule clarifying the standard for employee versus independent contractor under the Fair Labor Standards Act (FLSA). The effective date of the final rule is March 8, 2021.
In the final rule, the Department:
- Reaffirms an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).
- Identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:
- The nature and degree of control over the work.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
- Identifies three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the worker and the potential employer.
- Whether the work is part of an integrated unit of production.
- The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
- Provides six fact-specific examples applying the factors.
Exempt versus non-exempt from overtime.
The “Fair Labor Standards Act” basically says that all employees have to be paid overtime unless they are exempt. That is where the language of exempt (Not subject to overtime rules) versus non-exempt employees (subject to overtime rules) comes from. So the question is who is exempt.
We have placed the section of our CEO’s newest book “The Payroll Book, a Guide for Small Business and Startups”.
Exceptions to the Rule: Who Is Exempt?
While the FLSA applies to the majority of employees in the United States, it does allow employers to claim exemptions from its requirements for certain employees whose jobs meet specific criteria.
Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime requirements for employees employed in bona fide executive, administrative, professional, and outside sales positions. Section 13(a)(1) and Section 13(a)(17) also exempt certain employees in computer-related occupations. These exemptions are defined in the department’s regulations located at 29 CFR Part 541 (hereafter the “Part 541 exemptions”).
To qualify for one of these exemptions, employees generally must meet certain tests regarding their job duties and be paid a certain minimum salary. Job titles alone do not determine exempt status, and neither does the receipt of a particular salary. In order for an exemption to apply, an employee’s specific job duties and earnings must meet all of the applicable requirements. It is important to note that simply paying an employee a salary does not relieve an employer of minimum wage and overtime obligations to that employee. Unless they meet the criteria of a specific exemption, employees covered by FLSA protections who are paid a salary are still due overtime if they work more than 40 hours in a week.
This guide provides an overview of each of the Part 541 exemptions and describes the basic tests and requirements to qualify for each. The specific salary levels listed below apply to begin on January 1, 2020, which is the effective date of the revised regulations implementing the exemptions.
If you have specific questions about any of these exemptions, please contact the Wage and Hour Division (WHD) at 866-4US-WAGE for assistance, or visit them online at www.dol.gov/whd and search for “exemptions”.
Claiming an Exemption
For an employer to claim an exemption for a particular employee the following three conditions generally need to be satisfied:
- Payment on a salary basis: the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
- Payment of a minimum salary level: the amount of salary paid must meet a specified minimum amount.
- A duties test: the employee’s job duties must primarily involve those associated with exempt executive, administrative, professional, outside sales, or computer positions.
Basic Requirements for Exemption
|Exemption||Salary Level Test||Salary Basis Test1||Duties Test|
|Highly Compensated Employees||
1 This chart does not include the special salary levels applicable to US territories or the special “base rate” for the motion picture producing industry.
The Salary Basis Test
Generally, for an employer to claim a Part 541 exemption from minimum wage and overtime requirements for an employee, that employee must be paid on a salary basis.
Being paid on a “salary basis” means an employee regularly receives a predetermined amount of money each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Generally, an exempt employee must receive at least the required weekly salary amount (discussed in more detail in the section titled “The Salary Level Test”) for any week in which the employee performs any work, regardless of the number of days or hours worked. Exempt employees do not need to be paid for any workweek in which they perform no work. Deductions from pay are permissible only:
- When an exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability.
- When an exempt employee is absent from work for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy, or practice of providing paid sick leave.
- To offset amounts employees receive as jury or witness fees, or for military pay.
- For penalties imposed in good faith for infractions of safety rules of major significance.
- For unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions.
See 29 CFR 541.602.
An employer is not required to pay the full salary in the initial or final week of employment, or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. If the employer makes improper deductions from an employee’s predetermined salary, that employee is not paid on a “salary basis.” If the employee is ready, willing, and able to work, deductions may not be made for times when work is not available.
The salary basis test does not apply to outside sales employees, teachers, and employees practicing law or medicine.
Administrative, professional, and computer employees may be paid on a “fee basis” rather than on a salary basis. If the employee is paid an agreed sum for a single job, regardless of the time required for its completion, the employee will be considered to be paid on a “fee basis.” A fee payment is generally paid for a unique job rather than for a series of jobs repeated a number of times and for which identical payments are repeatedly made. To determine whether the fee payment meets the minimum salary level requirement, the test is to consider the time worked on the job and determine whether the payment is at a rate that would amount to at least $684 per week if the employee worked 40 hours. For example, an artist paid $500 for a picture that took 20 hours to complete meets the minimum salary requirement since the rate would result in $1,000 if 40 hours were worked.
The Salary Level Test
Standard Salary Level
Generally, an employee must be paid at least $684 per week to qualify for one of the Part 541 exemptions. Exempt computer employees may be paid at least $684 per week or on an hourly basis of at least $27.63 an hour.
The salary level test does not apply to outside sales employees, teachers, and employees practicing law or medicine. Academic administrative employees may qualify for exemptions either by satisfying the standard salary level test or, alternatively, by being paid on a salary basis at a rate at least equal to the entrance salary for teachers in the educational establishment by which the employee is employed.
Special Salary Levels
The regulations provide for special salary levels for certain U.S. territories and an updated base rate for employees in the motion picture producing industry. A special salary level of $455 per week applies to Puerto Rico, the US Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands. A special salary level of $380 per week applies to American Samoa.
The regulations also establish a special “base rate” threshold for employees in the motion picture producing industry. The base rate is $1,043 per week, or a prorated amount based on the number of days worked.
Total Annual Compensation Requirement for Highly Compensated Employees
Employees who receive total annual compensation of at least $107,432, referred to as “highly compensated employees” (HCEs), are exempt from the minimum wage and overtime requirements of the FLSA if they meet a more relaxed duties test than is required for employees paid the standard or special salary levels (the HCEs duties test is discussed below in the “Duties Tests” section of this guide). Nondiscretionary bonuses and incentive payments (including commissions) may be counted toward the $107,432 HCEs total annual compensation requirement, but the employer must pay at least the full standard salary level of $684 per week on a salary or fee basis to qualify for this exemption. If an employee’s total compensation in a given annual period fails to meet the $107,432 threshold, an employer may make a “catch-up” payment within one month of the end of the annual period. Any such catch-up payment counts only toward the prior year’s total annual compensation. If such a catch-up payment is not made within the timeframe allotted, the exemption is lost and overtime premium pay must be paid in any week the employee worked more than 40 hours.
Nondiscretionary Bonuses and Incentive Payments
Employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard or special salary levels. Thus, for the standard salary level, employers may use such payments to satisfy up to $68 of the $684 per week threshold, but must still pay at least $616 per week on a salary basis.
For employers to credit these payments toward the salary level test, they must be paid on an annual or more frequent basis. The employer may use any 52-week period, such as a calendar year, a fiscal year, or an anniversary of the hire year. If, by the end of the 52-week period, the sum of the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal the required salary level for the 52-week period ($35,568 for the standard salary level for a full-year worker), the employer may make a “catch-up” payment to achieve the required level within one pay period of the end of the 52-week period. Any such “catch-up” payment counts only toward the prior year’s salary, not toward the salary amount during the 52-week period in which it was paid. If such a catch-up payment is not made within the timeframe allotted, the exemption is lost and overtime premium pay must be paid for any week the employee worked more than 40 hours.
Nondiscretionary bonuses and incentive payments (including commissions) are forms of compensation promised to employees to induce them to work more efficiently or to remain with the company. Examples may include individual or group production bonuses and bonuses for quality and accuracy of work. Incentive payments, including commissions, are also considered nondiscretionary, as such payments are generally based on a prior contract or understanding, and employees generally have a contract right to the commission promised.
By contrast, discretionary bonuses are generally paid without prior contract, promise, or announcement, and the decision to provide the bonus and the payment amount is at the employer’s sole discretion. An example would be an “on-the-spot” award made without announcement and at the employer’s sole discretion (e.g., an unannounced year-end bonus). Discretionary bonuses cannot be used to satisfy any part of the salary level requirement.
As noted above, employees who are exempt under the HCEs test must receive at least the standard salary amount ($684 per week) on a salary or fee basis. The HCEs test does not permit any portion of this amount to be satisfied by nondiscretionary bonuses or incentive payments. Thus, HCEs must receive the full standard salary amount each week on a salary or fee basis.
The Duties Test
To qualify for any of the Part 541 exemptions, employees must meet certain tests regarding their job duties. The regulations establish separate duties requirements for executive, administrative, professional, outside sales, and computer employees, respectively.
Most employees who are exempt under the white-collar exemptions are subject to the standard duties test. Under the standard duties test, an employee’s primary duty must be that of an exempt executive, administrative, or professional employee. “Primary duty” means the principal, main, major, or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.
Certain employees can also qualify for exemption under the special test for HCEs. As discussed above, this test applies only to employees who receive total annual compensation of $107,432, including at least $684 per week on a salary or fee basis. Under the HCEs duties test, the employee’s primary duty must still consist of office or nonmanual work, but the employee need only “customarily and regularly” perform one of the exempt duties of a bona fide executive, administrative, or professional employee, as described in the regulations.
The duties requirements for each of the exemptions are described below in greater detail.
To qualify for the executive employee exemption under the standard test, all of the following job duties requirements must be satisfied:
- The employee’s primary duty must be managing the enterprise in which the employee is employed, or managing a customarily recognized department or subdivision of the enterprise.
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent (for example, one full-time and two half-time employees are equivalent to two full-time employees).
- The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, promotion, or any other change of status of other employees must be given particular weight.
To qualify for the administrative employee exemption under the standard test, all of the following duties requirements must be satisfied:
- The employee’s primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers.
- The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.
Academic administrative personnel whose primary duty is performing administrative functions directly related to academic instruction or training in an educational institution, such as principals and vice-principals responsible for the operation of an elementary or secondary school; department heads at institutions of higher education; academic counselors who perform work such as administering school testing programs, assisting students with academic problems, and advising students concerning degree requirements; and others with similar responsibilities are eligible for a special alternative salary level that does not apply to employees outside of an educational institution. These academic administrative personnel are exempt from the FLSA’s minimum wage and overtime requirements if they are paid at least as much as the entrance salary for teachers at their educational establishment.
Several different kinds of “professional” employees may qualify for the professional employee exemption. These include “learned professionals,” “creative professionals,” teachers, and employees practicing law or medicine.
To qualify as a “learned professional” under the standard test, all of the following duties requirements must be satisfied:
- The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment.
- The advanced knowledge must be in a field of science or learning, including law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical, and biological sciences, pharmacy, and other occupations that have a recognized professional status and are distinguishable from the mechanical arts or skilled trades, where the knowledge could be of a fairly advanced type, but is not in a field of science or learning.
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction, which means specialized academic training is a standard prerequisite for entry into the profession.
To qualify for the creative professional employee exemption under the standard test, the employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. This includes such fields as music, writing, acting, and the graphic arts.
Teachers are exempt if their primary duty is teaching, tutoring, instructing, or lecturing in the activity of imparting knowledge, and if they are employed and engaged in this activity as a teacher in an educational establishment. Exempt teachers include, but are not limited to, regular academic teachers, kindergarten or nursery school teachers, teachers of gifted or disabled children, teachers of skilled and semi-skilled trades and occupations, teachers engaged in automobile driving instruction, aircraft flight instructors, home economics teachers, and vocal or instrumental music teachers.
Employees Practicing Law or Medicine
An employee holding a valid license or certificate permitting the practice of law or medicine is exempt if the employee is actually engaged in such a practice. An employee who holds an academic degree for the general practice of medicine is also exempt if they are engaged in an internship or resident program for the profession.
Outside Sales Exemption
To qualify for the outside sales employee exemption, all of the following duties requirements must be satisfied:
- The employee’s primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer. “Sales” includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition. It includes the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property.
- The employee must be customarily and regularly engaged away from the employer’s place or places of business.
Computer Employee Exemption
To qualify for the computer employee exemption, the following duties requirements must be satisfied:
- The employee must be employed as a computer systems analyst, computer programmer, software engineer, or another similarly skilled worker in the computer field.
- The employee’s primary duty must consist of:
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications.
- The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications.
- The design, documentation, testing, creation or modification of computer programs related to machine operating systems.
- A combination of the aforementioned duties, the performance of which requires the same level of skills.
HIGHLY COMPENSATED EMPLOYEES
An employee with a primary duty of office or non-manual work who meets the HCEs compensation requirements ($107,432 per year in total annual compensation, with at least $684 per week on a salary or fee basis) is exempt if the employee customarily and regularly performs at least one of the exempt duties of a bona fide executive, administrative, or professional employee, as described in the regulations. An employee who performs such exempt duties only on an isolated or occasional basis will not satisfy this duties requirement.
5) Have you ever paid an IRS or State penalty based on employment taxes?*
There are steps to prevent penalties that every business can take. There are also steps to try to have any penalty assessed removed or abated. Here is a link to a book excerpt on the various normal penalties for employment taxes, how to avoid them and how to abate them if you are penalized. Remember that the IRS has over 100,000 employees and some of their technology is badly out of date. They make millions of mistakes a year but you have to be able to call them out about a mistake to get them to back off.
Six steps you need to take to stay compliant.
There are six key steps to take to stay compliant with your State and the IRS:
- Make sure that all your calculations are perfect. The number one thing businesses get penalized for is simple arithmetic mistakes.
- Make all of your deposits on a timely basis. Every. Single. One.
- Know every return you need to file for all regulatory authorities that tax you in your State and locality as well as the IRS.
- File all your returns on a timely basis. Even if you have to file a return that is wrong. File it on time and amend it later. Then you won’t be penalized for late filing.
- Answer all correspondences you receive. Taxing authorities lose things, misplace them, and misfile things constantly.
- Keep detailed records of what, when, how you correspond or communicate in any way with a taxing authority; and make copies.
Eight things to do when the IRS penalizes you.
- The first thing to remember is that the IRS cannot penalize you for a simple mistake. It has to be gross negligence. There is no fixed definition of gross negligence in the tax code. It is at the discretion of the IRS, or finally the courts.
- If your mistake results in having paid less than the required taxes, pay the additional tax due immediately. That stops additional interest and penalties on the actual tax amount.
- Write the IRS at the address on their letter. Explain what happened. There are some things the IRS may accept. Ask for an abatement (reversal) of the penalty and the interest. They will probably not abate the interest on the tax amount but may well abate the penalty. If they refuse to abate the penalty, they will give you an appeal route. Make sure your letters lay out the rationale for the abatement in detail. You may not get a chance to add to the circumstances or reasoning later. Keep appealing until you get the answer you want. It can be a whole series of noes followed by a single yes.
- Keep all correspondence. Keep notes on any phone calls. Always get the IRS employee’s ID number and the name and if possible a call back number or at least an address.
- If the second letter does not work, write a third. Send this letter to the Appeals Division, or wherever you’re directed to appeal to, where more knowledgeable people work. You have an excellent chance of getting an abatement here.
- Remember these are people with an impossible job. They deal with irate people all day long many times enforcing laws that Congress passed that make little or no economic sense, and they know it. Be nice to them. Be friendly. Laugh! They tend to return the attitude they get from taxpayers. You will get the occasional bad attitude, many times you can excuse yourself and call back, getting a different person with a better attitude.
- If offered a Collection Due Process (CDP) hearing take it. This may be the best shot at getting a resolution. It also stops all collection activity in most cases. The IRS employees holding the hearings have a good deal of latitude and a lot of knowledge. Restate in detail or even attach copies of your previous letters to the request.
- If all else fails, see if you can file a Pro Se (on one’s own behalf) Petition with the US Tax Court. The vast majority of cases (over 95%) are settled before they ever go to court. It also stops the collection process until the case is closed.
6) Have you ever had an unemployment claim held up against your firm that you thought should not have been?
Your SUTA (State Unemployment Tax) rate will go up and down based on your experience — that is, the number of claims paid to former employees. It will also go up and down based on the status of the state fund, if the fund gets to low the state will kick up everybody’s rate to make up the shortfall
A good plan for hiring and terminating employees is very important. You can pay several thousand dollars a year per employee or less than $25.00 per year per employee depending on how employees are terminated, how many unemployment claims are filed, and the state you operate in.
Unemployment Tax Rate & Terminations
Your unemployment tax rate changes based on two factors. The base rate and limits charged by the State where you employ people to keep the State Unemployment Benefit Fund at a level the State thinks it is necessary to maintain to be able to pay unemployment claims. This rate will vary from year to year based on the overall economic performance of the economy and how unemployment in the State is trending. As unemployment goes up and or economic activity slows down creating more unemployment claims the State will increase the base unemployment compensation rate on all employees in the State. They may also increase from time to time the amount of wages that they collect the unemployment taxes on.
The second factor is the amount of unemployment claims that are charged back against your company. When there is an unemployment claim made by an ex-employee that is held to be chargeable to your company the State will attempt to get back from your company all of the benefits they have paid out in the form of higher unemployment taxes. These tax increases will apply to all of your employee’s wages to the limit the Sate sets for roughly three additional calendar years, If you are increasing headcount your taxes will be higher on every employee based on the State’s calculation.
Chargeable Unemployment Claims.
What makes for a chargeable claim? Whether or not the termination was for cause or not. If you discharge an employee for cause the State should not chargeback your unemployment account for the benefits (if any) paid to the ex-employee. They can be instances where the State will pay an unemployment claim even if the employee was fired with cause, things such as unavoidable medical problems that prevent someone from working, but still not be charged back to your company account.
So what is the cause and what isn’t cause?
Cause Due to Misconduct
Companies should spell out in their handbook/employee manual what constitutes misconduct. The handbook/policy manual should delineate what misconduct will be disciplined (and how) and what misconduct is grounds for termination either on the first occurrence or after a stated number of occurrences within a time period. Handbooks/policy manuals vary but some normal misconduct that are grounds for termination include:
- drug and alcohol abuse,
- misuse of company computers and equipment,
- theft of property and
- sexual harassment.
Cause Due to Performance
It is difficult to claim cause for lack of performance. If you have performance standards specified in your handbook/policy manual for specific jobs and the employee agreed to meet these standards you may have some sway in an unemployment hearing. If you terminate an employee for poor performance it is best to document the entire situation to prevent against wrongful termination lawsuits.
Termination without Cause
“Termination without cause” is a misnomer. Obviously, you have a reason, good or bad, if you desire to terminate an employee. It can be as simple as they irritate you, It can be for budget reasons, It can be due to changes in technology. It can be due to redundancy. It can be their lack of ability to do the job. It does not matter. As a non-public employer in the US, and in any State, you may terminate any employee at any time for any reason you wish unless that termination is constrained by state statute, federal statute, or union contract.
Regardless of why you are terminating an employee, documentation is key to winning in a hearing for unemployment claims or for chargeback of those claims to your company. You want to write up all violations of the handbook/policy manual. I stress for all employees. There may be one employee that is a target for termination but if you treat that employee and their actions different than other employee you run the risk of lawsuits for wrongful termination and or discrimination. Write up the violations, write up the counseling attempts to correct the errant behavior or performance. Write things up and document everything that you can. Hearing officers and the law tend to be biased toward the employee with reason. The employer usually has the money, resources, personnel and time to fight an unemployment case where the employee may not. The more documentation you have showing that you tried to correct and keep the employee the better. When you counsel an employee have them sign off on documentation. Have witnesses present if practical. Have a program in place and stated in your handbook/policy manual (that the employee has acknowledged in writing that they have read). Document, Document, and Document. It may not be enough to win a case but without documentation, the hearing officer is going to give as much weight to the ex-employees testimony (or more) as your testimony and you will lose.
7) Do you have signed agreements with your employees for all non-legally mandated employee deductions?
Any deductions that are not mandated by law must be signed off by the employee. Taxes, child support, student loans, and other garnishments do not need to be signed off by the employee. The law mandates that the employer withholds those reductions of earnings.
Any deduction other than those required by law you should have a form to be kept in the employee personnel file with the details of the deduction including:
- How it will be withheld (all at once, so much per paycheck, a percent per paycheck etc.)
- That any unpaid amounts at termination (voluntary or involuntary) will be due from the final check or other arrangements
- Employee’s Signature
If you don’t have this documentation you may find that your State Labor Department will force you to repay an “Illegal” or “Unwarranted” deduction to the employee. Documentation is the key for dealing with the government. If you can prove the employee wanted, authorized, and expected to pay such a deduction, provided it is a legal deduction, then you can usually prevail in a labor department hearing or if necessary, court.
Some of the deductions that you will have the employee sign off on are loans and advances, equipment, tools, uniforms, keys, and others.
8) Do you have internal control procedures in place for the payroll area to prevent embezzlement, fraud, and theft?
I am going to list a few items here to think about but talk to your Controller or outside CPA, they are trained in internal control and can help you design a system. Even if you don’t have all the separate people you need for complete segregation of duties, there are ways to increase controls. Embezzlement is a growing crime and more common in small businesses than most people would guess.
Segregation of Duties
Segregation prevents one person from doing something both incorrectly (by accident or on purpose) and without oversight. No one should be able to take an action without someone else reviewing that action. In a small business, that may end up being the owner, but it is still necessary.
The person verifying the hours for people should not be the one handing out paychecks. Paychecks should be delivered in-person, if possible. If not possible on a regular basis it should be done occasionally on an unannounced basis. Hiring personnel should not be entering rates in the payroll system. No employee should be processing their own payroll.
Records should only be available to the person that needs to see them and/or enter the data in the payroll system. The rest of the time, records need to be in secured storage. All undistributed paychecks need to be under lock and key. Management needs to be notified of all undistributed checks or vouchers.
- Authorized signatures for checks, reports, input, and changes, and so on need to be reviewed and updated on a regular basis.
- The permission and ability to change time keeping records needs to be reviewed on a regular basis and changed as needed.
- Passwords need to change on a regular basis, preferably as often as monthly.
- Access needs to be reviewed on a regular basis to make sure that everybody with access to the payroll systems only has access to the level of their need and responsibility.
- Review attendance, pay, overtime and other payments regularly and compare with your company policy manual to make sure all policies are being followed.
- Review monthly payroll cost reports, compare actual to budgeted and investigate variances in detail.
- All incident/discrepancy reports need to be reviewed and signed off on by management.
- Audit – procedures and internal controls, on a regular basis to make sure everything is being done.
9) How many employees do you have?
There are a number of laws passed by Congress that affect different sizes of employers based on the number of employees. This Link lists the various statutes based on the lowest numbers of employees you must have to come under the jurisdiction of that particular law and what the enforcing Department is.
Fair Labor Standards Act (FLSA), enforced via DOL
Employers must properly classify and pay employees a corresponding minimum wage, while following overtime and child labor standards. FLSA also defines exempt (not entitled to overtime) vs. non-exempt (entitled to overtime and scheduled breaks) employee restrictions.
Immigration Reform & Control Act (IRCA), via DOL
Employers may only hire those who can legally work in the United States and must maintain up-to-date I-9 forms for all employees.
Employment Retirement Income Security Act (ERISA), via DOL
Employers’ private pension and health plans must give participants information around plan features, funding, and responsibilities. One key ERISA amendment includes COBRA (see below).
Federal Income Tax Withholding, via IRS
Employers must withhold and pay the federal government a set percentage of employee wages for the federal government.
Federal Insurance Contribution Act (FICA), via IRS
Employers must withhold and pay the federal government a set percentage of employee wages for Social Security and Medicare.
Equal Pay Act (EPA), via EEOC
Employers must pay male and female employees the same wage for the same job. One key amendment includes the Lilly Ledbetter Fair Pay Act that updates the original 1963 Equal Pay Act.
Uniformed Services Employment & Reemployment Rights Act (USERRA), via DOL
Employers must permit employees to be absent from work for military duty and retain reemployment rights for up to five years, as well as make reasonable efforts to accommodate veterans’ disabilities.
National Labor Relations Act (NLRA), via NLRB
Employers cannot prohibit employees from or discipline them for forming or joining unions. One key amendment, the Labor Management Relations Act, grants employers an equal position in union-employee-employer disputes and outlines dispute procedures.
Uniform Guidelines for Employment Selection Procedures, via EEOC
Employers may not discriminate against employees or applicants on the basis of race, color, religion, sex, or national origin.
Employee Polygraph Protection Act (EPPA), via DOL
Employers cannot use lie detector tests in pre-employment screening or during employment (with some exceptions).
Sarbanes-Oxley Act (SOX), via SEC
Public companies must follow set mandates to enhance corporate responsibility, combat fraud and provide financial disclosures.
Consumer Credit Protection Act (CCPA), via DOL
Employers must follow employee wage garnishment requirements.
Fair and Accurate Credit Transactions Act (FACT), via Federal Register
Employers must carefully dispose of consumer credit information to prevent unauthorized access.
Health Insurance Portability and Accountability Act (HIPAA), via HHS
Employers cannot receive health care information about employees from health care providers.
Occupational Safety and Health Act (OSHA), via OSHA
Employers must follow federally-set standards providing safe employment conditions, hazard communication, and personal protective equipment.
Recordkeeping, The Occupational Safety and Health Act (OSHA), via OSHA
Employers of this size must maintain records in compliance with OSHA, mentioned above.
American with Disabilities Act (ADA), via DOL
Employers may not discriminate against people with disabilities in employment, transportation, public accommodation, communications, and governmental activities.
Genetic Information Nondiscrimination Act (GINA), via EEOC
Employers may not discriminate against employees or applicants based on genetic information (genetic risk factors, family medical history, disease susceptibility, etc.).
Title VII, Civil Rights Act of 1964, via EEOC
Title VII prohibits sexual harassment and other forms of sex discrimination in workplaces. Key expansions and amendments include the Lilly Ledbetter Fair Pay Act and the Civil Rights Act of 1991.
Age Discrimination in Employment Act (ADEA), via EEOC
Employers may not discriminate in hiring practices against workers age 40 and older.
Consolidated Omnibus Budget Reconciliation Act (COBRA), via DOL
Employers must offer covered employees and their families the option to continue health insurance for 18-36 months after ceasing employment (duration depends on circumstances). Employees may be required to pay full insurance premiums.
Affordable Care Act (ACA), via HHS
Employers of this size are classified as Applicable Large Employers (ALEs) under the ACA and must offer affordable health insurance options, as defined by the law, with strict recordkeeping requirements. Note that this mandate applies to 50+ “full-time equivalent” workers.
Family and Medical Leave Act (FMLA), via DOL
Employers must offer up to 12 weeks of unpaid, job-protected leave to eligible employees following the birth, adoption, or foster placement of an employee’s child or serious family illness.
Affirmative Action Program (AAP), via DOL
Employers must create programs to actively recruit and train minorities, women, disabled persons and covered veterans, with accompanying recordkeeping requirements.
Worker Adjustment Retraining Notification Act (WARN), via DOL
Employers must notify employees at least 60 calendar days in advance of workplace closings and mass layoffs.
EEO-1 Survey Filing (Title VII, Civil Rights Act of 1964), via EEOC
In compliance with Title VII, employers must maintain diversity records for workplaces and individual employees. If the organization is a federal contractor, this threshold becomes 50+ employees.
Employers with Federal Contracts, Any Size
Employers of all sizes with federal contracts have additional compliance requirements and modified thresholds mandated by laws not outlined above, including:
- Davis-Bacon Act
- Drug Free Workplace Act
- Contract Work Hours and Safety Standards Act (CWHSSA)
- McNamara-O’Hara Service Contract Act (SCA)
- Executive Order 11246
- Vietnam Era Veterans’ Readjustment Act
- Vocational Rehabilitation Act
- Walsh-Healy Act
- Copeland Act
There may be additional state-specific laws that apply to businesses in your state, some of which may set forth different or conflicting obligations than those described above.
10) Who do you use to process your payroll?
We believe in outsourcing payroll. It is not for everyone but the following reasons make a lot of sense when you look at them. If you are not outsourcing you may want to consider it. If you are outsourcing and not getting everything you think you should, give us a call.
Nine reasons to outsource payroll:
- Get the best in payroll processing for less
A payroll-outsource company is constantly upgrading and improving their ability to provide the best service for you. They upgrade their software and systems on a regular basis. They of course have to keep up with the changes in the law of all 15,000 plus payroll-taxing entities as they happen. A payroll outsourcing company must be able to print out any updated form as needed or they will have to do it by hand.
2) Deflect unwanted and unwarranted government interference
Occasionally everyone misses a deposit or filing deadline, forgets a form or otherwise makes a mistake that results in a penalty that YOU have to spend a great deal of time resolving and usually end up paying the penalty anyway. Outsource payroll companies greatly minimize the chance that your company will pay any penalties or interest due to missed deposits, late filings, bad calculations or other clerical and computational errors of your payroll taxes. If a payroll outsourcing company makes a mistake, they are responsible for the research and costs. They have much more practice in doing this kind of work and make very few mistakes; otherwise, they do not last very long in the business. A good outsourced payroll company should deposit your payroll taxes and file all your payroll tax reports – on time, every time. After all, they are not processing taxes for just one company; they are filing for hundreds or even thousands of companies.
3) Protection from check fraud artists who could/would raid your bank account
When you use a payroll company to process your payroll, you reduce the number of checks that you write substantially. This not only lowers your accounting costs by reducing the size and complexity of your bank reconciliation; it can also reduce your banking fees. It reduces the checks that can fall in to the hands of check fraud specialists. Check fraud is the largest dollar value crime in the country year after year. The Nilson Report indicates that check fraud exceeds $20 billion dollars a year and the American Bankers Association recently stated that check fraud losses are growing by 25% per year. Payroll processing track associations, hire specialists to consult about reducing fraud. A good outsourcing company should be able to discuss numerous devices that they use to protect themselves and their clients from fraud.
4) Take advantage of Tax Credits that you may not even know exist
A payroll outsource company should have the ability to check to see if your company or location makes tax credits available for hiring some or all new employees. This varies widely from State to State and location to location. It is very hard to keep up on all of the available credits unless you are in the business.
5) Upgrade privacy for you and your employees
When you outsource payroll you actually increase your security and privacy. All the reports are computerized and encrypted. No reports left around for people to see. No boxes of old reports. Your payroll outsource company should have the ability to restore all your old files to a new computer for you if the existing one is compromised in any way. With direct deposit and employee self-service, there are no paychecks or paystubs to be left in the wrong place for the wrong person to see.
6) Take a vacation
With an internet-enabled payroll provider, you can input payroll form any internet-connected computer in the world. We have a client who submits payroll via the Starbucks Wi-Fi at the beach in Hawaii twice a year. You can have someone else submit the payroll and then you can check it from anywhere. You have the option to submit early or just have the payroll company replicate the previous payroll. It is like having a staff without having to pay for it.
7) Call on payroll tax experts at no charge
Your payroll service provider should have CPAs on staff, and maybe a United States Tax Court Practitioner, to answer your technical and legal questions. If you have to talk only to a call center or a clerk then you are not getting the service you are paying for. They should have employment tax experts on staff to advise you and to be able to advocate for you to the IRS and the States. You would not go to court without an attorney why would you even talk to the IRS without a CPA or go to Tax Court without an accredited Tax Court professional.
8) Save time
No checks to print. No tedious filing. You don’t have to keep up with tax or software updates. You don’t need to keep up with changes in tax or employment law. You don’t have to become a payroll professional. Your payroll service provider should have them on staff. Your payroll service provider will keep up on the changes and advise you if there is something you need to do. No calculating net pay and taxes. No filling out tax forms. No remembering to make tax deposits timely.
9) Save money
Having current software always available at no additional cost. No costly tax updates sometimes multiple times in a year. No penalties for small oversights. Have less staff time and training to keep up with changes to payroll and tax laws. Your payroll service provider offers you economies of scale on everything from paper, checks, envelopes, to banking fees. Everything that saves you time saves you money. Everything that lessens your exposure to fraud saves you money. Everything that increases privacy without you having to do anything saves you money.
11)How often do you pay your employees?
The federal government through the Fair Labor Standards Act (FLSA) sets the standard workweek at 168 continuous hours. Seven consecutive 24-hour periods. This is a predefined period, and the employer can set when it starts. It can be from midnight Saturday to midnight Saturday or it can be 9:15 Monday morning to 9:15 Monday morning, but it must be seven days straight. This is so you can figure overtime mandated under the FLSA.
Even if you pay every two weeks, you have to figure overtime for both of the 168-hour weeks separately.
If you pay your employees semimonthly, you make figuring overtime more difficult because you will have periods of time that can overlap at the beginning or end of a regular workweek. Say your workweek is from Sunday through Saturday but your pay period is the first of the month through the 15th and the 16th through the last day of the month.
Let’s take the month of March 2019 as an example. March 16 (a Saturday) falls into the workweek of March 10 through March 16. Then, the next seven days into the workweek of March 17 through March 23, the following seven days into the workweek of March 24 through March 30 and then the 31st falls into the next workweek of March 31 through April 6. This means you have to keep looking forward and backward to see if there are more than 40 hours in a workweek that have to be paid as overtime in a pay period.
If you use a biweekly schedule you can combine the two workweeks into one 14-day pay period. You still have to calculate the overtime for each workweek separately.
If you have a weekly pay period, and some states may still require some weekly payrolls, then your workweek and pay period should coincide and any overtime is very simple to figure.
Once the beginning time of an employee’s workweek is established, it remains fixed regardless of the hours the employee is scheduled to work. However, the beginning time of the workweek may be changed if the change is intended to be permanent and is not designed to evade the overtime requirements.
PAY FREQUENCY (PAY PERIOD)
The pay period is the period of time that you collect pay for or how often you pay your employees. The normal pay periods are:
Quarterly and annual pay periods are used occasionally in very special circumstances. In most cases you are required to pay at least monthly and, in some cases, more often than that. Here is a link to a chart showing the state-by-state requirements for pay frequency: www.dol.gov/whd/state/payday.htm.
We recommend where possible that you pay on a biweekly basis. Monthly is not available in many cases for employees that are subject to overtime provisions of the FLSA or the states.
Semimonthly makes overtime difficult to calculate because the workweek for determining overtime does not coincide with the pay period, which may require you to go back and forth between pay periods to calculate overtime.
Biweekly should be two full workweeks. You can calculate any overtime in each workweek and include it all on the payment for that pay period. It cuts down the number of payrolls you have to run from 52 if weekly to 26. It may well cut down on the number of deposits you have to make to the government. It helps improve cash flow for the business. It is well accepted in most industries. It is a good balance between cost and convenience.
Different states have different payday requirements. They are available on the same link as above for pay frequency requirements. FLSA requires that you pay your employees for work they have done but does not set when you must pay them; that is left to the states to determine.
I suggest at least five days between the last day of the pay period and the actual payday. Seven is even better. I like to suggest to new clients that they consider a two-week pay period ending on Friday, with payday the following Friday. This eliminates a lot of problems. It gives you time to work around holidays without jumping through hoops. If the person doing payroll is sick for a day or two, it does not pose a problem. It just makes life easier than trying to figure payroll today for a check date of tomorrow.
In some states, you can go as long as 16 days between the end of the pay period and the payday. Almost no one tries to meet payroll on the last day of the pay period anymore. That forces an employer to make adjustments every pay period for what they think the employees would work, but for whatever reason they didn’t work or worked beyond.
Remember: Every state has enforcement mechanisms on payroll, pay periods, paydays, and pay. There are fines and penalties for not paying people at the proper time or the proper amount. There are also different regulations on when you must pay people who terminate and that can vary whether the termination is voluntary or involuntary.
If you have any further questions, please email us at firstname.lastname@example.org. In addition, you should subscribe to our blog at www.getpayroll.com