Employers will, of course, face penalties for hiring undocumented workers, including civil fines and potentially face criminal prosecution. Editor’s Note: Read more about the potential legal ramifications in Tim Pastore’s June Legal Brief column at www.securityinfowatch.com/55291383.
Employment Taxes
Unpaid employment taxes – the dollars withheld from employees – represent nearly 70% of all revenue collected by the IRS. These so-called “trust fund” taxes, which include income tax, Social Security, and Medicare tax, are a big deal, and failure to withhold or pay them over is a serious issue with the IRS.
The Trust Fund Recovery Penalty is assessed when a business doesn’t withhold and pay over payroll taxes withheld from their employees’ paychecks. The penalty is 100% of the withheld taxes, and the IRS can hold a variety of individuals accountable, not just businesses.
Independent Contractors
Many security businesses prefer labeling workers as independent contractors because they are not subject to minimum wage, overtime pay, or payroll tax withholding requirements. Many security integrators and consultants prefer them for the freedom they offer; however, misclassification of employees as independent contractors can lead to retroactive benefit payments, fines, and penalties.
The IRS’s general rule says an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done. In other words, someone is not an independent contractor if they perform services that can be controlled by an employer (what and how it will be done). This applies even if the individual is given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.
Helping avoid the high cost of misclassification is the IRS’s Voluntary Classification Settlement Program (VCSP), which provides partial relief from federal employment taxes for eligible taxpayers who agree to treat workers as employees.
Overtime
Federal overtime provisions are contained in the Fair Labor Standards Act (FLSA). Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay.
There is no limit in the Act on the number of hours employees aged 16 and older may work in any workweek. The FLSA does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime is worked on such days.
Individuals who are classified as executive, administrative, or professional employees are considered “exempt employees.” All “non-exempt” employees must be paid at least the minimum wage and overtime after 40 hours worked in a week.
After a failed attempt to increase the minimum threshold for overtime exemption, it has reverted to $35,568 per year ($484 per week). Employees earning below this threshold are generally entitled to overtime pay.
Keeping it in the Family
Many security businesses are run by spouses, with profits shared. Under the tax rules, they may be partners, regardless of whether they have a formal partnership agreement; thus, the income should be reported as a partnership on Form 1065, U.S. Return of Partnership Income. If operated as a joint venture, a business jointly owned by a married couple who both materially participate in the business, the spouses can choose not to treat the joint venture as a partnership by making a qualified joint venture election.
When both spouses do more than minor work for a security business operated as an LLC, they are required to be on the payroll and receive a reasonable wage for the work performed. In other words, a spouse cannot simply be added as a member to avoid paying a fair wage or to save money on payroll taxes.
Wages earned by minor children of the security business’s owners or operators are deductable by the business. It is a similar story for payments made by a systems integrator, installing dealer, electrical contractor, or security consultant operating as a sole proprietorship or a partnership in which each partner is a parent of the child. Those wages are not subject to Social Security and Medicare taxes.
Conversely, payments made by a security business operating as other than a sole proprietorship or partnership are subject to income tax withholding, regardless of the child's age, as well as subject to FICA and Medicare.
Good recordkeeping is a necessity when it comes to their hours, and the amount paid should be in line with other employees doing similar work.
Bonuses
Bonuses and raises are different and not interchangeable. In many situations, a security business cannot avoid raising wages to remain competitive with other employers. Bonuses, on the other hand, are a way of compensating employees for a good year without becoming locked into a higher wage structure.
Bonuses can vary with business conditions and can be eliminated in poor years. A raise could negatively affect the business if it suffers a reversal or if economic conditions worsen.
