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Common Payroll Issues

In today’s business environment, employers must be well-versed in tax, employment, and benefits guidelines to maintain compliance with all the various regulations. Based on the experience of Paychex, Inc. in working with hundreds of thousands of employers, this information includes the most common payroll pitfalls that companies may encounter, and should be aware of, to help avoid hefty fines.

Accuracy of Social Security Numbers

To ensure accurate and timely W-2 filing, employers must ensure that they provide accurate Social Security Numbers on their employee’s W-2s. A W-2 filed with the Social Security Administration with an incorrect or missing Social Security Number and/or employee name will be held in suspense and the wages will not be credited to the employee. The Social Security Administration provides a tool which employers can use to verify the Social Security Number matches the employee name. The Social Security Number Verification Service (SSNVS) is available for free on the SSA website at www.ssa.gov.

Reinstatement of Social Security Rate

The Tax Relief Act of 2012 did not extend the "payroll tax holiday." For 2013, the employee Social Security tax rate will go from 4.2 percent back to 6.2 percent, up to the 2013 taxable wage limit of $113,700. As a result, a worker earning $50,000 per year will now see $1,000 less in their net take-home pay as compared to 2012.

Self-employed individuals will also see an increase in the social security portion of the self-employment tax from 10.4 percent to 12.4 percent.


FUTA Credit Reductions

2012 saw an unprecedented number of states classified as Credit Reduction states for Federal Unemployment (FUTA) tax purposes. These states had to take out a loan from the Federal Unemployment Trust Fund to be able to meet their state unemployment obligations and were unable to pay the balance of the loan off with in the two year window set by the Federal government. As a result, the following states will have their FUTA credit amount reduced for 2012 filing as a way to recover the funds still owed to pay pack these loans: Arizona, Arkansas, California, Connecticut, Delaware, Florida, Georgia, Indiana, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, Vermont, Virgin Islands and Wisconsin. This credit reduction will result in an increase in FUTA tax that employers must pay at the end of the year.

Health Care Law / Medicare Changes

The Health Care law, known as the Affordable Care Act of 2010, has several provisions which take effect in 2013. One of these provisions is an increase in the Medicare tax rate. As of January 1, 2013 the Medicare tax rate for employees earning over $200,000 ($250,000 for joint filers) will increase 0.9% making the new rate for 2013 2.35% for wages in excess of the $200,000 ($250,000 for joint filers) threshold. This change will not impact anyone earning under $200,000 in wages. The Medicare tax rate for these individuals will remain at 1.45%. This change only affects the employee portion of Medicare. The employer portion remains unchanged at 1.45% for all employees’ wages.

Employee Misclassification (employee vs. independent contractor)

One of the most common mistakes made by small business owners is not properly classifying workers. It is critical that small businesses understand the distinction between an employee and an independent contractor and the various guidelines used to make the determination.

As a general rule, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

Properly classifying workers can alleviate confusion and possible fines against the company. For more information about worker classification, refer to the IRS website at: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html


Overtime Rules

An employer who requires or permits a non-exempt employee to work overtime is required to compensate the employee with the appropriate premium pay for such overtime work. All non-exempt employees covered by the federal Fair Labor Standards Act (FLSA) must receive overtime pay for hours worked in excess of 40 in a workweek at a rate of at least one and one-half times their regular rate of pay. Employers should refer to the FLSA's regulations to ensure appropriate classification of exempt vs. non-exempt employees and to identify those employees entitled to overtime pay.

The FLSA does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime hours are worked on such days. State laws may vary and may require additional premium pay for hours worked. Premium pay for working weekends or nights may also be a matter of agreement between the employer and the employee (or the employee’s representative).

Ensuring payment of appropriate overtime rates to eligible non-exempt employees can help employers avoid potential fines and penalties associated with non-compliance.

Exempt vs. Non-Exempt

Some employees may be exempt from certain minimum wage and overtime requirement provisions of the federal wage and hour law, the Fair Labor Standards Act (FLSA). These employees may also be exempt from similar provisions under state wage and hour laws. Examples of exempt employees under the FLSA include the white collar exemptions: executive, administrative, professional, certain computer professionals, and outside sales. Exempt employees must generally be paid a minimum amount on a salary and/or fee basis, which is not subject to reduction based on the quality or quantity of work performed.

The FLSA, enforced by the U.S. Department of Labor, Wage and Hour Division, requires employers to pay non-exempt employees a minimum hourly wage rate and overtime pay for hours worked in excess of 40 in a work week of at least one and one-half times their regular rate of pay. Implementing regulations for the FLSA define working time for purposes of compensation.

Employers are encouraged to ensure proper classification of their employees under both state and federal law to avoid the possible unplanned financial burden of penalties and fines associated with wage and hour violations.


Garnishments and Child Support

Wage garnishment takes the form of a court order requiring an employer to withhold an employee’s earnings for the payment of a debt. Title III of the Consumer Credit Protection Act prohibits an employer from discharging employees because their earnings have been subject to garnishment for any one debt, regardless of the number of levies made or proceedings brought to collect it.

Employers must always include the employee case number with garnishment payments. This simple component of conscientious recordkeeping makes the posting process much more efficient for the garnishing agency and may save the employer from the possibility of delinquency notices.

Employers must also be mindful of federal and state new-hire requirements. New-hire reporting is the process by which an employer reports information about newly hired employees to a designated state agency shortly after the date of hire. New-hire reports are matched against child support records at the state and national levels to locate parents who owe child support monies. This is especially helpful for interstate cases (in which one parent lives in a different state from the child), which are often the most difficult cases for states to resolve. With new-hire reporting, state child support enforcement agencies can issue income-withholding orders, the most effective means of collecting child support in a timely fashion.

When multiple garnishment orders are in effect, the employer has to consider which orders take precedence over others. The employer must also be mindful of the maximum percentage of the employee’s wages that may be garnished.


Small Business Tax Credit

As part of the Patient Protection and Affordable Care Act (PPACA) the Internal Revenue Service (IRS) implemented the Small Business Tax Credit. This was designed to offer small business a tax credit for offering a qualified health insurance plan to its employees, and paying at least 50% of its cost.

To receive a credit (35% for profit businesses and 25% for tax-exempt employers) the employer had to employ fewer than 25 full time equivalent employees that earned, on average, less than $50,000 per year. However, a full credit could only be obtained if the employer had 10 or fewer full time equivalent employees earning, on average, $25,000 or less per year.

The tax preparation of the credit is believed to be time consuming for some, for the amount of credit that they are entitled to receive. For many business owners, it was difficult to easily determine if they were eligible for a credit at all. So, rather than paying for the additional time it would take to determine if there was a credit, many chose to ignore it altogether.

Paychex anticipating this dilemma, created tools for our small business clients. A tax calculator was developed to put the taxpayer in the “ballpark” when trying to determine if he may be eligible for a credit and for approximately how much. Also, our small business payroll clients who had their health insurance through the Paychex Insurance Agency were afforded a year end report with the wage and insurance premium information needed to calculate the credit. This tool was used by both employers and their accountants, greatly simplifying the calculation process. An email marketing campaign drove clients to these online tools.

Going forward, our desire is to further simplify these tools to make them even more user friendly in order to assist even more clients in requesting their small business tax credit.


Tax Agency ID Requirements

Each business must have a valid, agency-assigned identification (ID) number for each tax agency. Employers without valid agency ID numbers should consult federal, state, and local tax agencies and follow the appropriate registration protocol to secure their ID. Tax returns filed and/or payments remitted without referencing a valid agency ID may delay proper posting of information to the respective employers’ account and could likely result in penalty and interest assessments.

A federal tax ID number or federal employer identification number (EIN) is similar to a social security number for a business. The IRS uses the EIN to identify a business and the ID must be included on all tax filings. Banks also typically require an EIN to open a business bank account. Other companies with which an employer does business may ask for an ID number to pay submitted invoices.

For information about obtaining a federal EIN or to apply for a number online, go to :

http://www.irs.gov/businesses/small/article/0,,id=98350,00.html

States require a unique identification number for the same reasons. For information about registering with an agency to obtain a specific tax agency ID, visit:

http://www.irs.gov/businesses/small/article/0,,id=99021,00.html


Keeping Abreast of Regulatory Changes

One of the great values in working with Paychex is that our regulatory experts are constantly monitoring compliance-related issues that may impact our 564,000 clients across the country.

Each year brings a series of new regulatory, compliance, and legislative changes that can affect every small business. Paychex continuously monitors regulations that could have significant impact on employers’ payroll, taxes, and retirement plans.

Many states continue to face critical budget shortfalls, and as such, may impose impromptu tax/fee increases or filing changes to raise badly needed revenue.

Unemployment insurance (UI) funds in many states are at critically low levels due to the large numbers of people out of work for extended periods. Many employers will see continued increases of state employer UI contribution rates to replenish depleted UI trust funds and repay federal loans taken to allow states to continue to pay benefits.

Staying on top of the new payroll and tax laws can be burdensome. Understanding the requirements of these rules and laws requires even more time and effort. Paychex clients can rest assured that we’re on top of these issues and will be there to help navigate the constantly changing regulatory environment.

This content has been provided by Paychex, Inc. For more information, visit www.paychex.com
or call 1-800-322-7292.

Publication date January 2013. The material contained above is current only as of the date of publication. These materials are for informational purposes only. They are not legal advice and should not be relied on as such. You should contact your attorney to obtain advice with respect to any particular issue or problem.