Understanding Payroll Taxes

shutterstock_324599615Tax season has returned and with it comes a variety of questions about the impact of taxes on payroll. Padgett Payroll Services® employs only the best experts in our field. Our goal is not only to offer payroll solutions for your company, but to help you save money in the process. That is why we put together this quick guide to tax deductions and management for businesses of all sizes: because payroll taxes aren’t the only thing you can deduct this spring! Continue reading

Payroll Processing Specialists: A Small Business’ Best Friend

Small businesses face many unique payroll problems that frequently fall on already overworked H.R. departments or leave payroll administrators to fend for themselves in a big world of tax codes, regulations and stiff penalties for missed deadlines. The IRS doesn’t mess around when it comes to your company’s payroll or tax services. Fortunately, Padgett Payroll Services® utilizes experts with years of experience to take the stress of payroll services out of your hands, allowing your employees to focus on what matters most: your customers. So, why is a Padgett payroll processing specialist your company’s best resource? The answers might surprise you. Continue reading

Average U.S. Business Employs Fewer People Than Just 10 Years Ago, DOL Report Says

Small Business Payroll Size TrendsThe number of workers on the average U.S. business establishment’s employee payroll has fallen, and not just because of the recent recession and the slow pace of recovery from it. In fact, the mean number of employees at each U.S. business establishment – defined as a single physical business location, regardless of its affiliation with a larger company – has fallen steadily for more than a decade, according to a study published by the Department of Labor (DOL) in March.

The DOL report, which was authored by two economists in its employment statistics bureau, put the number of employees per establishment at 15.7 in 2010, up slightly from the year before but significantly down from a high of 17.5 in 2000. The figure had risen steadily during the tech boom of the 1990s, but began declining after the tech bubble burst and has trended steadily downward ever since.

Very small business payrolls – those with five or fewer employees on them – began to represent an increasing share of the total U.S. workforce throughout the 2000s at both the establishment level and the firm level (the total number of workers at all of a company’s physical locations combined).

Since the trend toward smaller staff sizes began during a period of economic expansion in the early 2000s, well before the late-2000s recession, the authors of the DOL study suspected that there are forces contributing to a downsizing trend that have nothing to do with the overall health of the U.S. economy.

Some of the possible explanations for decreasing establishment size would be:

  • the need for fewer workers in both support and production roles because of advances in computer and machine technology
  • the possibility that today’s telecom and information technology enable a single firm to establish more geographic locations to serve customers while still keeping each of those establishments minimally staffed
  • the increasingly available option to farm out support functions via moves such as outsourcing payroll, human resources functions, accounting and business tax management
  • a greater number of employees working remotely from home
  • increased use of independent contractors

Another obvious possibility would be that as the American economy changes, proportionally more companies are in industries that require fewer workers on average. To test this idea, the DOL economists broke down the average establishment size by industry over the years. While the size of establishments has been shrinking in “old economy” industries such as manufacturing and utilities, the same trend also showed up in fields such as information, finance and technical or scientific services.

However, the authors of the study came to the surprising conclusion that the factor that correlates most strongly to the size of a business establishment is its age. Newer companies, perhaps because of some of the reasons mentioned above, typically start out smaller and add employees more slowly than they used to, across all industries.

Newly established businesses in the 1990s started up with an average of 7.6 workers. By 2001, the average was down to 6.8 workers, and by 2011 it had fallen to just 4.7 workers. As some older firms inevitably go out of business, newer companies employing fewer workers on average make up a larger and larger share of the economy.

A New York Times business writer commenting on the DOL report suggested that if each new company is employing  fewer workers on average, only the creation of more startups can keep the number of available jobs on pace with the size of the American workforce.

For small businesses in search of an expert payroll specialist to provide accurate and timely payroll services, Padgett Payroll Services is the one to call. Padgett offers affordable state-of-the-art payroll administration and payroll management tools.  Call now at 877-244-5842 to learn more about how Padgett Payroll Services can help your enterprise succeed in today’s competitive economy.

Outsourcing Payroll? Hiring a Reliable, Experienced Payroll Processor is Vital

Payroll OutsourcingMore and more small businesses are finding out that hiring an outside payroll processing company is an efficient and cost-effective way to take care of employee payroll duties. Indeed, handing off the routine tasks of payroll management to a contract payroll processor frees up valuable time for the owner of small business and his or her limited workforce to concentrate on things more directly related to the survival and success of the company.

It’s important to keep in mind, though, that using a third-party payroll manager does not legally shift the blame for any payroll mistakes that might occur. Employers are ultimately responsible for correctly compensating employees and complying with all federal, state and local labor laws as well as regulations pertaining to withholding and remittance of taxes.

Payroll errors are unnecessary headaches that cost time and can possibly hurt employee morale. And, as we discussed previously in this blog, the potential fines that could result are not trivial, and could be particularly crippling to a small business. Improper withholding or late remittance of income taxes, or of deductions for Social Security, Medicare or unemployment insurance, can be severely penalized, especially for repeat offenses. The law even provides for jail time as a punishment for flagrant and willful violations.

Employers are also responsible for following wage garnishment orders for employees who owe child support, back taxes, criminal restitution and student loans. Failing to comply with a garnishment order from a court or duly authorized government agency can result in fines, and the employer may be held liable for the employee’s financial obligation itself.

The point is not that you should be afraid to turn over your payroll functions to someone else – the advantages of doing so are too great. But obviously, you should be very selective when choosing your payroll processing company. Look for an experienced payroll firm with a solid reputation and a proven track record of accuracy, reliability, responsiveness and experience.

For the greatest assurance that your company’s payroll administration is being done with the precision it deserves, hire an experienced payroll specialist from Padgett Payroll Services. Padgett has been helping small businesses since 1966, and today we perform payroll services for thousands of companies across the U.S. Call Padgett Payroll Services today at 877-244-5842 and get the convenience of payroll outsourcing along with the peace of mind that Padgett’s knowledge and professionalism bring.

More of the Jobless Are Receiving Unemployment Benefits

Unemployment Insurance Benefits Takeup RateNot only does unemployment in the United States remain high several years into our current historic “great recession,” but the percentage of the unemployed who are actually receiving unemployment benefits is at a 50-year high.

The number of the unemployed who are taking advantage of benefits provided by unemployment insurance – what economists call the “takeup rate” – never rises to anywhere near 100 percent. In fact, in 1986 the takeup rate was only 31 percent, meaning more than two-thirds of the unemployed population then did not receive benefits.

Takeup rates spiked in the two most recent past recessions, but even then the rates rose only to the 50-55 percent range. The current recession, on the other hand, has seen takeup rates as high as 68 percent. Casey B. Mulligan, a University of Chicago economics professor writing for the New York Times, says that the takeup rate in 2009 may have been the highest ever.

The reason that takeup rates spike in recessions is obvious to economists – the unemployed population during a recession includes a much higher proportion of people who were laid off, and probably qualify for benefits, as compared to people who voluntarily quit, and thus do not qualify.

Other variables that are thought to increase unemployment compensation takeup rates include:

  • offering higher levels of benefits
  • streamlining the process of filing for and receiving benefits (putting some of the application and certification process online, for instance)
  • higher levels of household financial distress (families’ lack of a savings cushion or home equity)
  • greater pessimism about the job market and the length of time it will take to find another job
  • reduced stigma about receiving benefits through a government-administered program

With so many payroll deductions to comply with such as unemployment insurance, social security and workers compensation, even small business payroll processing can be complicated. Padgett Payroll Services can simplify the life of a small business owner with our expert knowledge and efficient performance of employee payroll administration. Call Padgett Payroll Services today at 877-244-5842 to begin getting the benefits of professional payroll processing for your company.

Bonus Pay Is Taxable Income, But Special Withholding Rules Apply

Employee Payroll BonusCash bonuses paid by employers to employees for performance, achievement or service are taxable just like wages are. It’s important for a payroll manager to be aware of this and to comply with tax withholding laws when disbursing bonus checks. As with regular wages, withholding and remitting too little from bonus payments can result in serious IRS penalties.

The Internal Revenue Service classifies bonus payments in the category of “supplemental wages,” which also covers a wide range of payments that fall outside of basic employee payroll, such as commissions, overtime pay, payments for accumulated sick or vacation leave, severance pay, awards, prizes, back pay and retroactive pay increases.

Employees receiving a bonus for the first time may not even be aware that the money is taxable. Others may be taken aback when by the amount of the withholding, which may be disproportionately large compared to the deductions from their regular checks. Some employees may believe that their payroll processor has made an error. Others may draw the common but mistaken conclusion that the IRS taxes bonus pay at a higher rate than regular wages.

Payroll administrators may be well advised to clear up employee confusion on that last point. Ultimately, employees’ bonuses will be taxed at the same rate as the rest of their wages, which will be determined by the tax bracket they fall in based on their total income for the year. However, federal income tax may initially be withheld from the bonus payment at higher rate. At tax time, any net overpayment will be returned by the IRS in the form of a refund.

IRS regulations give different options for withholding income tax from bonus payments to employees, except for the very largest bonuses. Bonuses to an employee totaling more than $1 million in a year automatically incur a 35% federal income tax withholding. Anything less than that can be treated one of several ways:

  • Combine the bonus along with that pay period’s regular wages and calculate withholding based on the total
  • Identify the regular and supplemental wages separately and withhold a flat 25 percent from the supplemental wages
  • Identify the regular and supplemental wages separately. Calculate withholding based on just the regular wages and withhold that amount from regular wages. Then calculate withholding based on the total amount. Subtract the first number from the second number, and withhold this amount from the supplemental wage portion of the employee’s pay.

It’s not hard to see why these methods can create the false impression among employees that their bonus is money is being subject to some kind of “special” tax. The 25 percent rate is higher than many employees’ regular withholding rate. With the other two methods, employees may “temporarily” be elevated into a higher tax bracket, because payroll systems usually annualize each pay period’s earnings for tax calculation purposes.

Take an example of an employee who normally earns $1,000 per week ($52,000 a year). Say he or she gets a $2,000 bonus the last week in December. The bonus actually increases the employee’s income for the year by less than 4 percent, but as a lump sum payment it triples their wages for the last pay period. Thus, withholding on that last check is calculated as if the employee had earned $156,000 for the year. Portions of that check will be subject to much higher marginal withholding rates of 25 and 28 percent.

Keep in mind that regardless of the method used to withhold income tax on supplemental wages, they are also subject to social security, Medicare, and unemployment insurance withholding. Supplemental wages are subject to any applicable state and local taxes as well. Employees could easily see 40 percent or more of their bonus being withheld, even though they may get a good portion of that back as a refund when they file their tax returns.

Padgett Payroll Services is a small business payroll specialist that can help your company with the complexities of tax and payroll law. Call us today at 877-244-5842 to learn more about the advantages of payroll outsourcing to Padgett.

Tips for Employers on Employees’ Tips

Tips and Payroll ManagementPayroll processing for any company presents challenges, but for companies whose employees receive tips, proper and accurate payroll administration is even more complicated. The good news for employers in most states is that tips can be counted as part of an employee’s pay for purposes of complying with minimum wage laws. The bad news is that accounting for tip income for tax purposes adds an additional layer of paperwork and reporting and relies on the cooperation of employees for accuracy.

The Fair Labor Standards Act makes an exception to the minimum wage law for any employee who is “engaged in an occupation in which he or she customarily and regularly receives more than $30 a month in tips.” Examples of businesses whose employee payroll would include customarily tipped workers are restaurants and bars, hotels, resorts, country clubs and casinos, to name some of the most obvious.

Under federal law, an employer can pay a tipped employee as little as $2.13 per hour, as long as his or her tip income is sufficient to bring the employee’s total earnings up to minimum wage. With the federal minimum wage currently at $7.25, employers can thus claim a “tip credit” up to $5.12 per hour. Some states however, have legislated lower tip credits. For example, Hawaii allows a maximum tip credit of only 25 cents per hour. Tip credits are not allowed at all in Alaska, California, Minnesota, Nevada, Oregon and Washington.

The high rate of payment by credit card and debit card has made tracking tips easier, but customers still leave many cash tips. While employees are required to regularly report cash tips to their employers, they naturally have financial incentives to underreport them. Needless to say, this is not OK with the Internal Revenue Service, which tries to root out tip underreporting in order to collect both income taxes from employees and payroll taxes from employers.

Most food and beverage establishments with tipped employees must file Form 8027 with the IRS, which compares reported tips to gross receipts. Form 8027 basically assumes that the overall rate of tipping in a restaurant would never be below 8 percent. If total reported tips don’t equal at least 8 percent of gross receipts, additional tip income is “allocated” to employees using one of several different methods. Note that even percentages above 8 percent might trigger a tip examination by the IRS if the agency has reason to believe that tips are being significantly underreported.

One way the Internal Revenue Service tries to encourage accurate tip reporting is by entering into voluntary enforcement agreements with businesses. An employer agrees to take very proactive steps to ensure that employee tip reporting is as accurate as possible; in return the IRS agrees to audit individual employees suspected of underreporting tips rather than first going after the employer for the unpaid FICA taxes on the tip income. These agreements may obligate an employer to take steps such as:

  • Educating employees about tip reporting laws
  • Establishing clear tip reporting procedures
  • Entering into tip reporting agreements with employees
  • Distributing blank forms for employees to record their tips daily, such as IRS Form 4070
  • Providing information on underreporting employees to the IRS

Minimum wage regulations and tax reporting compliance are only two of the issues that payroll managers must contend with when a business has tipped employees. Payroll outsourcing to a payroll specialist frees a busy business owner from the time and paperwork involved in complying with labor and tax laws relating to tipped employees. The professionals at Padgett Payroll Services can handle these and other payroll issues so that you don’t have to. To find out more about how we can lift the many burdens of payroll management off your shoulders, call Padgett today at 877-244-5842.

Employee or Independent Contractor? Classifying Workers Incorrectly Could Prove Costly

Independent Contractor & Payroll ProcessingThe Internal Revenue Service, in partnership with the U.S. Department of Labor and various state labor departments, continues to strongly enforce regulations meant to prevent misclassification of employees as independent contractors (ICs). Fortunately, an amnesty program is now in place that will allow an employer who has misclassified workers as ICs to bring them onto the employee payroll and avoid some of the federal penalties that would normally be incurred.

A crackdown on labor misclassification began in the middle of the last decade, partly because of the continually growing percentage of U.S. workers who were being hired as contractors instead of employees. Real and perceived abuses of led the IRS to hire a task force of another 100 agents earlier this year to investigate cases of worker misclassification. The estimated $25 million cost of stepping up enforcement is a drop in the bucket compared to the billions in formerly unpaid payroll taxes the government expects to bring in.

Businesses, of course, have many incentives – financial and otherwise – to hire some of their workforce as ICs instead of bringing them on as employees. Employers do not have to pay Social Security, Medicare or unemployment taxes on contractors, or offer them the same health insurance and other benefits that employees are eligible for. But the use of contractors also makes the workforce more flexible since hiring and firing them involves less paperwork and creates less risk of lawsuits based on alleged discrimination or other violations of labor laws. Payroll administration is simplified, too, because payments to ICs are simply reported on 1099 forms rather than going through the payroll processing system.

Needless to say, all of these advantages are lost – and then some – when the IRS makes a determination that a contractor actually fits the legal definition of an employee. Penalties and remedies for misclassification can include:

  • back payment of income taxes
  • back payment of payroll taxes (including what would normally have been the workers’ portion of Social Security taxes)
  • back pay to workers for unreimbursed overtime, sick leave or holidays
  • back payment of premiums to the company’s insurance provider
  • reimbursement to workers for medical expenses that the company’s insurance would have covered, had they been properly classified as employees

The Voluntary Classification Settlement Program (VCSP) announced by the IRS in September offers the possibility of greatly reduced federal back payments and penalties for qualifying employers who apply for the program, meet certain criteria and agree to certain stipulations. For example, businesses who want to voluntarily reclassify some of their ICs as employees must have filed all required 1099 forms for the last three years. They must also be willing to agree to leave the next three years’ taxes open to IRS audit for 6 years instead of the usual 3 years.

It’s important to remember that the VCSP is a federal program. Many states have enacted their own legislation on this issue in recent years, and the VCSP does not deflect any penalties or sanctions at the state level. California’s new misclassification law is particularly harsh, raising the maximum state fine for misclassifying a worker from $5,000 to $25,000.

Even small business payroll can be complicated, but it’s a lot simpler when you hire the experts at Padgett Payroll Services. Call 877-244-5842 today to find out more about the benefits of letting us take care of your company’s payroll management.

Payroll Tax Cut Extended for at Least Two More Months

Social Security Payroll Tax Cut ExtensionThe payroll tax cut that was in effect for 2011 was extended for another two months by a Congressional vote that took place just before Christmas. The employee share of the Social Security tax would have jumped from 4.2 percent back up to its pre-2011 rate of 6.2 percent on December 31 if federal lawmakers had not been able to reach a temporary compromise. Uncertainty remains among political analysts and payroll specialists alike as to whether the tax cut will be extended once again through the remainder of this year.

Because of the eleventh-hour nature of the compromise, some payroll administration systems may have been programmed to resume withholding from employees at the 6.2 percent rate. In these cases, the IRS advises payroll managers that they have until Jan.31 to implement the correct rate. Amounts over-withheld in January must then be paid back to employees no later than March. 31.

The continuation of the 2 percentage point reduction in the tax will result in about $83 more in monthly take-home pay in January and February for a worker earning at a rate of $50,000 annually. In 2011, the lower rate put a total of $1,000 more in such a worker’s pocket.

Highly paid employees – those who earn more than $18,350 in the first two months of the year – may eventually have to “repay” a portion of the 2 percent difference as part of their 2012 income tax liability. For those employees, a special 2 percent income tax will be levied against their January-February earnings in excess of $18,350, thus offsetting the Social Security tax savings on that portion of their income. This special 2 percent “clawback” or “recapture” tax won’t be payable until 2012 income taxes become due in 2013, and will likely be eliminated altogether if the Social Security tax cut is eventually extended through the remainder of this year.

An earlier version of the two-month extension compromise bill provided for the same effect to be accomplished through two-tiered tax withholding – a rate 4.2 percent up to $18,350, and 6.2 percent beyond that. Because of the difficulties that payroll processors would have faced in implementing such a complex withholding structure in such a short time, the National Payroll Reporting Consortium opposed this plan in a Dec. 11 letter to Congress.

Dealing with frequent changes to payroll taxes and the continual uncertainty in payroll laws can be difficult and distracting for a small business owner. Payroll outsourcing to the experts at Padgett Payroll Services relieves employers of the worry and burden of keeping up to date with these changes. Call Padgett today at 877-244-5842 to find out more about how we can help simplify the job of running your business.

The High Cost of Payroll Mistakes

Proper Payroll ManagementPayroll administration may be a mundane task, but it’s one that can create some serious repercussions if it’s ever done wrong. Monetary penalties for things like non-remittance or late remittance of taxes, incorrect calculation of overtime pay and improper retention of records can be severe, and can be especially harmful for small business with fewer resources to fall back on.

Almost as frustrating and harmful as wasting money on penalties or fines is spending irreplaceable time fixing payroll mistakes. And there are other consequences, harder to measure but very real, of botching employee payroll, such as added stress, the possibility of increased scrutiny from taxing authorities, loss of employee goodwill and – in the extreme – jail time.

Payroll processing is complicated because it’s affected not just by the complex tax codes at the federal, state and sometimes local levels, but also by regulations of the U.S. Department of Labor. One accounting firm estimates that there are about 100 DOL rules that affect payroll management. State labor departments and state insurance commissioners may also have regulations that pertain to payroll.

In addition to making the proper withholdings and deductions for taxes and benefits, employers may also be ordered to garnish wages for things like child support, back taxes, criminal restitution, student loans and private debts. Employers who fail to comply with wage garnishment orders can be held liable for the employee’s financial obligation, as well as collections costs and legal fees, not to mention punitive fines.

Some other complexities that payroll managers may have to handle accurately in order to avoid harsh consequences are:

  • Calculating and paying overtime correctly. Overtime wages due but not properly paid not only have to be reimbursed to the employee, but there can be government penalties of up to 100 percent.
  • Accounting for and allocating tip income.
  • Properly classifying workers as employees or independent contractors – and paying the applicable back taxes and penalties for illegally treating an employee as a contractor.
  • Remitting taxes and the proper tax forms in a timely way. The later taxes are paid, the more penalties and interest accrue.
  • Retaining complete payroll records for at least three years, or facing a fine up to $10,000. Repeat offenses can result in jail time.

What’s the best way to avoid these severe sanctions? Consider the alternative that an ever-increasing number of small businesses are making the move to – payroll outsourcing. By using an experienced contract payroll service, you’ll have the peace of mind of knowing that this important business function is being handled by payroll specialists who understand and keep current on all the relevant legislation and regulations.

Get the assurance of having your company’s payroll done by a specialized professional from Padgett Payroll Services. We’ve been providing small business payroll services for more than four decades, and we serve thousands of companies from coast to coast. Call Padgett Payroll today at 877-244-5842.