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VCSP CPA discusses common Payroll issues

While worker miss-classification is the hot topic in Payroll, there are other problematic areas, mostly centered around IRS compliance.

VCSP (Voluntary Classification Settlement Program)

I think it’s easy for the IRS to spot employees represented as subcontractors on your company’s tax return. And it has been for years. But they haven’t seemed all that capable of pursuing companies that miss-classify workers, at least on a large-scale. The IRS continuously improves their automation of payroll audits. So, eventually their bark will match their bite. And after all, they’re just encouraging you to obey tax laws. Coming clean with the IRS now is a good deal. The penalty is minimal. The main implication? The IRS may not be as forgiving in the future.

Cash Flow: think Gross Payroll times 110% not Net Pay

I think this is the most common trap Payroll CPAs see. Say you’re paying me $1000 per week, just to use a nice round figure. My net pay is $700, again just a nice round number to use as a talking point. Let’s assume you make monthly deposits to the IRS for payroll taxes. On the four paydays for the month your cash flow is OK. You planned on my $700 paycheck. But on the following 15th, you’ll owe the taxes you withheld from my check, PLUS the employer’s share of payroll tax, times four. If you throw in your State’s unemployment tax, as an example, the company has to come up with $1200. Now your cash flow may not support this “surprise.”

“Don’t think of Payroll in terms of net pay. As a rule of thumb, think Gross Payroll times 110% to better show your company’s true cost.”
-Gary Bode, VCSP CPA

Backup Withholding for Vendors: get the W-9

While not a true payroll issue, the IRS requires your company to withhold 28% of payments to a vendor that doesn’t supply you a W-9. A pain. Especially since most vendors are Corporations and thus exempt. But in an IRS audit, you could be liable for underpayment penalties, even when vendors are found to be exempt. It’s just easier to get the W-9 as required.

Late Penalties: related to cash flow above

Late penalties on payroll deposits, just for the IRS, is 2-15%. Before the recession, the downward cash spiral from late payroll deposits was the number one problem I saw in small companies. Again, think Gross Pay times 110%.

Not Filing 1099s

Most business tax returns specifically ask if you made payments that required submitting Form 1099-MISC to the IRS. If the answer is yes, did your company submit them? The real trap here isn’t the penalties, which was $50 per 1099, at least the last time I looked. I don’t know what the IRS will do if they catch you lying on this question. But I suspect it’s more significant than $50. Don’t let documentation land you in hot water.

I’m a VCSP CPA with a virtual office to accommodate clients outside my Wilmington NC geographical base. Read any of the hundreds of postings on this website to get a feel for my proactive attitude and abilities. If you don’t have a local VCSP or payroll CPA, consider calling me for a free phone consult at (910) 399-2705.


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