To help close the deficit, the IRS is zeroing in on employment taxes – especially worker misclassification, untaxed taxable fringe benefits and executive compensation. Is your firm making one of these ten common payroll mistakes?
1) Classifying workers who are employees as independent contractors.
2) No travel or commuting reimbursements reported as income. Some reimbursements may be taxable – e.g., travel to a permanent work site in a different location from the employee’s permanent residence or a short-term assignment that lasts longer than one year.
3) Not getting W-9s from vendors. Failure to obtain W-9s for payments may subject the amounts to 28% backup withholding and to failure-to-deposit penalties on amounts that should have been withheld.
4) Not including in income the FMV of cash or cash equivalents. Cash equivalents, such as a gift card for a Thanksgiving turkey or Christmas ham, are never de minimus. However, the gift of a turkey or ham is de minimus.
5) Not including in income taxable fringe benefits. Examples of taxable fringes include spousal travel, company-provided autos when not driven for business or when driven for business but not properly substantiated, and country club dues and housing that is not substantiated for business use.
6) Not including in income unsubstantiated expense reimbursements. Reimbursements are nontaxable only if they meet accountable plan requirements: substantiation of the amount (e.g., a receipt), date, business-related person or place and date when the expense was incurred. But if your company uses the per diem method for travel or cents-per-mile for driving, no receipts are required.
7) Not including nonqualified deferred compensation in executive income. If your deferred compensation plan was not amended to company with IRC 409A, Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans, you need to see what your options are.
8) Failure to timely deposit withheld taxes. Late deposits can incur a penalty of 2%-15% plus interest.
9) Failure to timely deposit withheld taxes on vested restricted stock and on exercised stock options.Deposit withheld employment taxes on exercised stock options within one day of the settlement date (which should be no more than three days after the exercise date). Generally, income on restricted stock is recognized upon vesting and subject to FITW and employment taxes on the difference between the shares’ FMV and what the employee paid for them. Deposit the FITW and withheld taxes on the next business day.
10) No 1099s when over $600 was paid in the year to ICs and vendors (corporate ICs or vendors are not included in this requirement).
The following article appears courtesy of The General Ledger, the newsletter for the American Institute of Professional Bookkeepers.