Why Payroll Errors Keep Happening

 

Misclassifying employees

Businesses need to properly classify workers (i.e., employee or independent contractor) and failure to do so can lead to hefty penalties. 

The U.S. Department of Labor (DOL) released in October 2022 proposed rules rescinding current worker classification rules (2020 final rule) and reverting to prior guidance.  

The 2020 final rule established a new standard for determining a worker’s status based on two core factors: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss based on initiative and/or investment. Other factors would only be considered if the two core factors were not helpful in making a worker determination. 

The proposal proposes a framework more consistent with longstanding judicial precedent on which employers have relied to classify workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). It would restore the multi-factor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA. 

Todd Lebowitz, a partner at BakerHostetler, said the proposed rules would only apply to FLSA requirements such as minimum wage, overtime requirements, and recordkeeping. A DOL determination would have “no direct impact on tax withholding,” Lebowitz noted. 

Incomplete records

Incomplete or missing records can cause a lot of headaches for employers. The FLSA requires that employers keep records for at least three years. Records used to compute pay should be kept for two years (i.e., timecards, work and time schedules, and records of additions to or reductions from wages). Such records must be made available for inspection by Department of Labor representatives.  

In addition to federal requirements, many states have their own record-keeping requirements for employers that must be considered. 

Overlooking fringe benefits

A fringe benefit is a form of pay for the performance of services. For example, allowing an employee to use a business vehicle to commute to and from work is a fringe benefit. And any fringe benefit an employer provides its employees is taxable and must be included in the recipient’s pay unless the law specifically excludes it.  

Additional factors include but are not limited to: If the recipient of the taxable fringe benefit is an employee, the benefit is generally subject to employment taxes and must be reported on Form W-2.  

If the recipient is not an employee, the benefit isn’t subject to employment taxes. However, they may have to report the benefit on one of the following information returns: Form 1099-NEC, Nonemployee Compensation (for independent contractors) or Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. (for partners). 

 Why Payroll Errors Keep Happening