Employers – all employers – are facing potentially expensive attacks on their bottom lines. The U.S. Department of Labor has proposed new rules that will make 1.3 million workers earning less than $35,568 annually eligible for overtime pay; however, that is not all. The abrupt shutdown of a national payroll company in Sept. 2019 left hundreds of thousands of workers without paychecks – and many employers liable for payroll taxes that weren’t forwarded to the IRS.
Further compounding the payroll headaches, California recently tightened the definition of “independent contractor” – with many other states expected to follow suit. Not to be outdone, the IRS announced an expansion of their worker misclassification education and enforcement campaign to combat employment tax crimes.
In the end, if payroll issues are not top-of-mind for security integration businesses, they should be – and new rules may be on the horizon. Understanding the basic rules for withholding payroll taxes – and paying over withheld amounts – on the wages of all employees in a security business can be difficult. Guidance and advice from a competent, qualified advisor is virtually a necessity.
Payroll taxes withheld by employers account for nearly 72% of all revenue collected by the IRS. Federal payroll taxes cover Social Security and Medicare contributions, which constitute the Federal Insurance Contributions Act (FICA) tax. Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their workers.
Payroll taxes generally fall into two categories: amounts deducted from an employee’s wages, and taxes paid by the employer based on the employee’s wages. Although some of these taxes are not payable by the security business, there is a legal presumption that if these withheld taxes are not forwarded to the IRS, it is an “unlawful retention” – which subjects the business or a “responsible person” to a whopping 100% penalty tax.
Employers know – or should know – that they must deduct, deposit and report employment taxes accurately; however, as with all taxes, the road is not always a smooth one. For this reason, many businesses are turning to payroll services.
Approximately 40% of small businesses use a third-party payer for tasks ranging from paying employees to federal employment taxes. When MyPayrollHR, a now defunct cloud-based payroll processing firm based in upstate New York, abruptly ceased operations in Sept. 2019, it left hundreds of thousands without paychecks – and many employers facing substantial penalties and fines for payroll taxes they were ultimately responsible for. That failure also drew attention to the increasing popularity – and downside – of payroll service firms.
With the employer ultimately responsible, the failure of the payroll company to file and forward payroll taxes causes significant problems, because the funds have been expended but the taxes remain unpaid. It also subjects employers to the dreaded 100% Trust Fund Tax Penalty.
Because the IRS does not regulate payroll service companies, the collapse of this payroll firm, or any payroll firm, should serve as a reminder to security business owners and managers to verify the actions of payroll service providers. This should be a routine practice, regardless of the provider’s reputation and the longevity of the relationship.
Even security businesses using payroll services should open their own accounts with the Treasury Department’s Electronic Federal Tax Payment System (EFTPS) and verify that all deposits are being made on-time to their payroll tax accounts.
When payroll taxes due the government are not paid, are paid late, or are paid but do not follow the correct guidelines, employers can face severe penalties as well as accruing interest. As mentioned, using a payroll service firm, may eliminate some worries about reporting, the accuracy of payments and getting payroll taxes paid on time; however, to reiterate, monitoring the payroll service is important.
When the security business pays its employees’ salaries, they must withhold payroll taxes and deposit those funds with the IRS. The funds are held in trust for the IRS and if not paid over are considered to be stolen by the business. As of 2017, nearly 6.9 million employers failed to pay those taxes and were slapped with more than $7 billion in penalties. The IRS has the authority to seize and sell the assets of that business.
Even worse, if the business is unable to pay or can’t pay within the time-frame the IRS demands, liability for paying can fall on a “responsible person” – making make key employees personally responsible for the unpaid payroll taxes. They can then seize and sell the personal assets of those individuals to pay the payroll tax liabilities of the business. A responsible person can include: Officers or employees of the incorporated business, members or employees of partnerships, corporate directors or shareholders, and other individuals with authority and control over funds to direct their disbursement.
The American Payroll Association has highlighted the “Gig” economy and the necessity for employers to stay ahead of this increasing trend of outsourced labor (Editor’s Note: Read about how the Gig economy might affect your security business in this March 2019 article from Security Business, “Go Gig or Go Home” – www.securityinfowatch.com/21069803).
Not to be outdone, the IRS announced its own crackdown on the misclassification of workers and those in the Gig economy using independent contractor labels.
Many employers in the security industry, have preferred to treat workers as independent contractors, reaping payroll tax savings, no fringe benefits or other expenses associated with employees. By the same token, those workers have lowered their own tax bills by shifting from being an employee to being an independent contractor.
Uber and other ride sharing companies have long been cited as examples of the Gig economy with their employment of independent contractors; however, courts in New York and California, among other States, are reaching the conclusion that some of these workers are actually regular employees. California has, in fact, passed a new law defining who is and who is not an independent contractor.
Whether on the federal or state level, the key question for security businesses is usually the degree of control over the work and who exercises that control. To help, an employer can submit a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Tax and Income Tax Withholding, for a worker classification determination. There is also the 20-factor common-law test from the IRS for employers to ensure they are in compliance with both federal and state laws.
New Overtime Rules
The Fair Labor Standards Act (FLSA) requires the payment of a premium for overtime. The old standard of “anything over 40 hours in a week” being considered as overtime has, in many instances, been usurped by daily overtime (one-and-a-half times the regular rate of pay) and double time (twice the regular rate of pay).
The U.S. Department of Labor announced new overtime rules that began in 2020, under which 1.3 million workers earning less than $35,568 annually will be eligible for overtime. Under the new rules, employees who do not perform managerial or supervisory duties must be paid time-and-a-half for any work over 40 hours a week.
Meanwhile, a number of states have, or are planning to, set their own overtime rules for workers in their jurisdictions that are above the new federal requirements. Be sure to check in the states your operate in.
More Rules to Come
Every security integrator that uses either employees or independent contractors must be cognizant of upcoming legislation, rules and more, including:
- No grace period for new 2020 withholding changes – Although employers may still have questions about using the revised 2020 Form W-4, Employee’s Withholding Certificate, and the new withholding methods, there will be no transition period. If an employer’s automated system is not current, the IRS suggests using the manual instructions four in Publication 15-T, Federal Income Tax Withholding Methods.
- The number 20 is a key – This is the point where many small businesses lose exemptions under many rules. For example, if a security business covers workers with health insurance, they do not have to provide coverage to workers once they turn 65, since Medicare becomes the primary insurer – but only if the operation has fewer than 20 employees. Many state rules also have an employee number threshold, often around 20, so be aware.
- An expansion of Social Security would extend the program’s solvency and expand benefits by raising payroll taxes on high-income earners.
- Compliance sweeps – The IRS is hiring 600 revenue officers and plans payroll compliance sweeps around the country.
Mark E. Battersby is a freelance writer who specializes in tax-related issues. Email him at [email protected].