PAYROLL

LAW

PRESENTED BY

PAMELA SHULL

If you would like copies of today’s presentation slides:

www.slideboom.comFile Name:

Shull Payroll Law US CA

(C) 2011 Fred Pryor Seminars

PRESENTATION SLIDES

WHERE AUDITORS ARE LOOKINGI R S A N D S TAT E U N E M P L O Y M E N T

1. Misclassifying workers

1. 1099 MISC Forms2. Form W-2

2. Taxable vs. Non-Taxable Fringe Benefits

D E PA R T M E N T O F L A B O R

1. Exempt vs. Non-Exempt Employees

1. Overtime errors

2. Garnishments

Government Tools

Compliance Guides – what the law says

Administrative Guides – how the law works

Company ToolsEmployee Handbook – what the law says

Payroll Policies and Procedure Manual – how the law works

Job Descriptions – overtime or not? Contractor or employee?

AUDIT TOOLS

PRESENTATION SLIDESIf you would like copies of today’s

presentation slides:

www.slideboom.comFile Name:

Shull Payroll Law US CA

INDEPENDENT

CONTRACTOR VS.

EMPLO

YEE

S E C T I ON 1

EMPLOYEE OR CONTRACTOR?WB-1

Type Worker FITW FICA SITW FUTA SUTA

Common Law Employee

X X X X X

Statutory Employee

X X X

Statutory NonemployeeContractor

IRS Test (pgs. 2 -3)

• Behavioral control

• Financial control• Relationship of

the parties

ABC Test (pgs. 4 – 5)

• Absence of control• Business is unusual

or away• Customarily doing

business as an independent contractor

IRS TEST VS. ABC TEST WB PAGES 2 - 5

IRS SECTION 530 – SAFE HARBORWB - 6

Result of previous IRS audit

IRS ruling – use of form SS-8

Industry-wide practice of long standing

CONTRACTOR VS. EMPLOYEE RECORDKEEPING

WB: 7 - 9 AND 10-11C 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

VALID W-4

Jane S. Smith Jan. 15, 2015

VALID W-4

Jane S. Smith Jan. 15, 2015

SSN MATCHING – E-VERIFYWB-11

• Social Security Number verification is suggested for all new hires after they are hired and before they are scheduled to work

www.ssa.gov – Business Services On-Line tab www.uscis.gov – E-verify tab

WITHHOLD

INGS:

MANDATORY,

VOLUNTARY,

AND INVOLUNTARY

(GARNISHMENTS)

S E C T I ON 2

THREE TYPES OF DEDUCTIONSWB-12

MandatedStatutory taxesRailroad retirement contributionsState mandated disability and retirement contributions

InvoluntaryGarnishments

VoluntaryHealth insurance, S-T-D and L-T-D, union dues, 401(k), etc.)

COURT ORDER PRIORITYWB-13

1. Bankruptcy (unless Support Order or IRS levy is served first)2. Support Order3. IRS Tax Levy4. Federal Student Loan (AWG)5. Federal Non-tax debt (AWG)6. State Tax Levy7. State Student Loan8. State Non-tax debt9. Local Tax Levy10. Creditors

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

Creditor25% of disposable or 30 times federal minimum wage from disposable (as of 7/24/09 = $217.50 per week)

Many states set their own limits. CA is the same as federal

Federal Law Limits – Garnishments

HOW THE CALCULATIONS WORKTA K E H O M E PAY ( I R S )• Gross minus:

• Taxes• Existing voluntary deductions• Child supports

• Equals Take Home Pay• Less: 668-W Chart (this

becomes the net pay)

• Equals IRS Levy Amount

D I S P O S A B L E PAY ( 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)

TAKE HOME PAY CALCULATIONGross: $750.00

Less: ( 85.00) – FICA/Fed With ( 15.00) – State Withholding ( 45.00) – Medical Ins. ( 25.00) – 401(k)

THP: $580.00Less: (275.94) – 668-W Chart

Levy Amt: $304.06 – Amt. to deduct from wages

Illustration Of Disposable Pay For General Garnishment***

Employee earns $500 per weekWithholdings: • Disposable Pay/Earnings:FITW $75.00 Gross Pay $500.00FICA $38.25 Taxes (133.25)State W/H $20.00 Disp. Pay $366.75Medical Ins $55.00 (30 x $7.25) (217.50)401(k) $50.00 $ 149.25

Limit (25%) $91.69Limit (10%) $36.68

ILLUSTRATION OF DISPOSABLE PAY FOR CHILD SUPPORT – MEDICAL SUPPORTWithholdings:FITW $75.00FICA $38.25State W/H $20.00Medical Ins $55.00401(k) $50.00

Disposable Pay:Gross $500.00Taxes (133.25)Medical Ins ( 55.00)

Disp. Pay $311.75

Limit 50% $155.88Limit 60% $187.05

Employee Owes:

1st - $100.00 = 28.5%

2nd - $100.00 = 28.5%

3rd - $150.00 = 43%

Total $350.00

Limit = $155.88

28.5% = $44.4328.5% = 44.4343% = 67.02

Total $155.88

PRO-RATION FORMULA

EXEMPT VS. N

ON-EXEMPT

EMPLO

YEES

S E C T I ON 3

BASICS OF FAIR LABOR STANDARDS ACT (FLSA)I N C L U D E D I N F L S A

Minimum Wage (states may set a higher rate)

Overtime requirementsRecordkeeping

requirementsChild Labor LawsEqual Pay

E X C L U D E D F R O M F L S A ( M AY B E S E T BY S TAT E L A W )Paid benefits (e.g.

vacation, sick, personal time off)

Breaks – lunch and restFrequency of payRestrictions for

children workers

WB-15

EXEMPT CLASSIFICATIONSWB-16

Federal Salary Requirements$455 per week – guaranteed

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 (July 1, 2014 - $3120 – approx. $720.00 per week)

Pharmacists and registered nurses are not eligible for professional exemption

EXECUTIVE EXEMPT REQUIREMENTS• 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

WB-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-25• Pay Option

• Salary (at least $455 per week) or• Hourly rate of $27.63 an hour

• California Pay Option:Hourly rate $40.38 (effective 1/1/14)Salary – no less than $84,130.53 annually or $7,010.88 per month

• (see http://www.dir.ca.gov/dlse/LC515-5.pdf)

• Computer programmers, designers of computers and system analysts

• Does not include: computer operators, repairpersons, technicians, data entry or help desks

ADMINISTRATIVE EXEMPT REQUIREMENTS WB 20-21

• 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 AccountingExecutive Exempt

Accounts Receivable

MgrAdmin. Exempt

A/R ClerkNon-Exempt

Accounts Payable Mgr.

Admin. Exempt

A/P ClerkNon-Exempt

Payroll Mgr.Admin. Exempt

Payroll ClerkNon-Exempt

ControllerProfessional

Exempt

Executive Secretary

Non-exempt

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 541.118 and .602)

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 SQUIRRELCan 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

38

WB-27

SALARIED FIXED CALCULATIONJim works 48 hours one workweek. His salary is $3000 per month

$3000 x 12 = $36,000$36,000 ÷ 52 = $692.31$692.31 ÷ 40 = $17.31$17.31 x 1.5 x 8 = $207.72$692.31 + $207.72 = $900.03

39

SALARIED FLUCTUATING CALCULATIONJim works 48 hours one workweek. His salary is $3000 per month

$3000 x 12 = $36,000$36,000 ÷ 52 = $692.31$692.31 ÷ 48 = $14.42$14.42 x .5 x 8 = $57.68$692.31 + $57.68 = $749.99

40

Must be stated in the job description and employee must sign an agreement to be paid this way.

SALARIED FLUCTUATING CALCULATIONJim works 48 hours one workweek. His salary is $3000 per month

$3000 x 12 = $36,000$36,000 ÷ 52 = $692.31$692.31 ÷ 48 = $14.42$14.42 x .5 x 8 = $57.68$692.31 + $57.68 = $749.99

41

Must be stated in the job description and employee must sign an agreement to be paid this way.

NON-EXEMPT BASICS WB-PAGE 26 - 32

Minimum wage requirementCalifornia minimum wage increase to $9.00 on July 1, 2014.

Effective January 1, 2016 – minimum wage will increase to $10.00

• Meal/Rest Break Rules• Suffered or permitted rules

California Basic Overtime Law• Any hours over eight to be paid at time-and-a-

half• 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)

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

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

LECTURES, MEETINGS AND TRAINING PROGRAMS WB-28-30

Not counted as working time (must meet all four requirements)1. Attendance is outside the employee’s regular

working hours2. Attendance is voluntary3. 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.

TAXABLE VS. NON-

TAXABLE FRINGE

BENEFITS

S E C T I ON 4

PRIZES, AWARDS, GIFTS AND BONUSES

WB 34 - 35

• 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 METHODSWB 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

SAMPLE CUMULATIVE METHOD

Example 1You pay John Peters a base salary on the 1st 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 $1,450.00.

SAMPLE AGGREGATE/CUMULATIVE METHODExample 2You pay Sharon a base salary on the 1st 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:

SAMPLE AGGREGATE/CUMULATIVE METHODExample 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 3Using 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

GROSS UP EXAMPLENet pay is $500Federal flat rate 25%State flat rate 5% (example only)FICA and Medicare 6.2% + 1.45% =

7.65%100 – 25 – 5 – 7.65 = 62.35%$500 / 62.35% = $801.93

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. 1542• Mileage reimbursement up to 57.5¢ (Jan. 1, 2015) • De Minimis up to $75.00**

• Most Allowances are taxable

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

Qualified Employee Discounts

n 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

n Qualified property or services - personal property or services provided to customers in the ordinary course of business

n Does not include real property or personal property held for investment

n “Employee” includes current and former employees who left because of retirement or disability, and their widow(er)s, spouses, and dependent children

n Company discounts must be followed if the employee is highly compensated (see Notice 2007-87, 2007-45 I.R.B. 966)

n Qualified employee discounts must be provided on a non-discriminatory 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

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

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 taxForgiven loans are fully taxable

MILITARY PAY PAGE 42

Supplemental Military PayCompensation 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 - 1099-MISC (over $600)

ACCURATE W-2 REPORTINGPAGES 43 - 45

Payroll Compliance LogbookDeposit and Remittance LogSpreadsheet with compilation of each pay period

Total for the quarter – match to 941 reportingTotal for year – match to W-2

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

1/15 75,320.00 18,076.80 5,761.98 3,012.80 753.20 5,761.98 29,600.76 1/16 2,259.60 753.20

Transposed numbers on deposit. Corrected on 2/16

1/31 76,558.24 18,373.98 5,856.71 3,062.33 765.58 5,856.71 30,087.39 2/1 2,296.75 765.58

2/15 73,449.34 17,627.84 5,618.87 2,937.97 734.49 5,618.87 28,865.59 2/16 2,203.48 734.49

2/28 76,480.19 18,355.25 5,850.73 3,059.21 764.80 5,850.73 30,056.71 3/1 2,294.41 764.80

3/15 72,589.37 17,421.45 5,553.09 2,903.57 725.89 5,553.09 28,527.62 3/16 2,177.68 725.89

3/31 74,392.68 17,854.24 5,691.04 2,975.71 743.93 5,691.04 29,236.32 4/2 2,231.78 743.93

Totals$448,789.8

2 $107,709.56 $34,332.42 $17,951.59$4,487.9

0 $34,332.42 $176,374.40 $13,463.69 $4,487.90

Date of Remittance 4/5 4/5

PENALTIES FOR NON-COMPLIANCEFor amounts not properly or timely deposited,

the penalty rates are as follows:2% - Deposits made 1 – 5 days late5% - Deposits made 6 – 15 days late10% Deposits made 16 or more days late. 10% - Amounts (that should have been deposited) paid directly to the IRS or paid with your tax return

15% Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due

Plus interest compounded daily

SURVIVE AN AUDIT: SHOW A “PATTERN OF BEING IN COMPLIANCE”Tools to show compliance:

* Administrative and Compliance Guides* Payroll Policies and Procedures Manual* Payroll Compliance Logbook* Record of on-going Training

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.