Contract Labor vs. payroll
HRQ
2,849 Posts
We just completed the purchase of another company! Woohoo!
I just learned that if an employee left before earning $600, they paid the employee as contract labor via Accounts Payable instead of through taxed payroll. (They have high turnover - around 120% annually, I believe)
It never occurred to me to ask whether or not all payroll is paid via payroll check.
In every case, the employee performed the same job duties as any other employee, but they justified paying through A/P because of the dollar amount of the earnings.
Is this legal? I advised them to immediately begin paying all wages through the payroll system, regardless of amount of earnings.
I just learned that if an employee left before earning $600, they paid the employee as contract labor via Accounts Payable instead of through taxed payroll. (They have high turnover - around 120% annually, I believe)
It never occurred to me to ask whether or not all payroll is paid via payroll check.
In every case, the employee performed the same job duties as any other employee, but they justified paying through A/P because of the dollar amount of the earnings.
Is this legal? I advised them to immediately begin paying all wages through the payroll system, regardless of amount of earnings.
Comments
Someone who says it's OK, please educate me. Where are the regs that say it's alright to pay some minimum amout of wages as contract labor. What's the maximum? Do you 1099 the recipient? Is that more work than putting them on the payroll?
This could well be the BEST POST EVER!
HRQ: You're bringing back memories. In my first job in HR, I worked for a company with 120% turnover. I used to tell supervisors that I had a lump of clay in my bottom desk drawer and if they'd just leave me alone I'd start making new employees. Good luck.
P.S. The usual 1099 rules apply when the dollar amount reaches a certain figure during a year. But this would not rise to that level.
A couple of quotes from Circular E: "Wages subject to federal employment taxes generally include all pay that you give to an employee for services performed. The pay may be in cash or in other forms." "For federal income tax withholding and social security, Medicare, and federal unemployment (FUTA) tax purposes, there are no differences among full-time employees, part-time employees, and employees hired for short periods." On a weekly payroll period, federal withholding for 'single, 1 allowance' starts at earnings of $115. As far as I know, Social Security tax starts at dollar one.
You can pay them out of your change jar if you want, but they better show up on your 941. That's my opinion, and I'm sticking to it.
As a standard practice, we attempt to run everything through payroll; however, from time to time a new employee may quit our employment relationship, before I am able to get to the remote location to formally enroll the individual. In this case we get a copy of the W-9 form and have the individual fill it out and return it to us. Upon receiving the W-9, a contract labor named file is created in the tax office. We forward the recorded accounts payable amount of money to the accounts payable accounting clerk, who will issue a check for contract labor. The amount of the contract labor is recorded and "should this person accum enough contract labor earnings to exceed $600.00", then our company is required to issue a supporting 1099 and send it to the individual like we do the W-2s at the end of the year. Any contract labor file that does not exceed $600.00 is closed and nothing further is reported in name and SSN for this person.
I was astounded! If these individuals decide not to report the $599.99 earned from this company they do not have to report it either. Therefore, our staff Accounting Manager insist that we attempt to run everything through payroll for two reasons: 1) 1099 administration and reporting is added work on the accounting tax clerk. 2) the individual is subject to no taxes if below $600.00.
I hope this helps all to have a clearer picture, it was well worth the short research course in staffing a particular action. I learned more than I surely freely give out in this posting.
My day has been Blessed, this "ole DAWG" learned something new today.
PORK
I think the answer lies in the definition of contractor vs employee. If the individual in question meets the definition, they should be paid through payroll. This would obviously include all the payroll taxes and workers compensation reporting.
Our WC provider audits our contractor payments account every year. If we cannot provide a certificate of coverage - we get charged for those contractors too.
I wonder if the IRS has ever audited the companies that do this. If they caught it, I wonder if they would have a different take on the practice?
Gene
I, too, am an old dawg, and I'd like to say I learned a new trick today, but so far, no such luck.
You hit the nail on the head. The employer was simply avoiding both the payment of taxes and staying under the 1099 radar. The only thing the employer is not guilty of is NOT paying wages. He chose to ignore the other obligations knowing it would never surface.
The previous company likely saved loads of employer social security contributions by paying cash to those who depart quickly, considering the high rate of turnover.
The w/c issue struck me too. An injured ee would be covered by w/c AND in the annual audit it would become evident that the er was not paying premiums on the quickly-termed staff AND not reporting them as contract labor during the audits.
Where it's hurting us now is the UI tax rate. I don't know about other states, but in AZ, we pay a % based on the first $7,000 earnings for every employee.
Not reporting taxable wages for ee's earning under $600, therefore not paying UI premiums on those ee's, has hurt because they are still liable for unemployment benefits for those ee's.
Their current SUI rating is .77, ours is .02. Without going into a big explanation, suffice it to say it's a big difference and I'm eager to get their rating down. Paying premiums appropriately and getting a consistent staff development and discipline program in place will go a long way... Documentation is not currently a strength. x:(
I don't know what your term of working for a short while or those with less than $600 earned... how long they actually worked. However this has worked for us and I know that it is legal.
We do have some true "contract" workers and they are paid through Acocunting and 1099 is issued.
E Wart
To me, the work of setting them up was a non-issue. It just takes a confirmed SSN, a name, and a few seconds keying the info. If the ee failed to complete the W-4, you can default them to Single/0 dependents, I believe.
If you paid the "contractor" through a temp agency, wouldn't that actually be MORE expensive than just paying via payroll and absorbing the SS match, w/c premiums and anything else that goes along with it? When you pay a temp agency, you are paying all those fees plus a little profit for the the agency too, it just doesn't look that way on the invoice.
I still just don't see the benefit to paying the employee as anything other than an employee.