Seminar presentation slides - Payroll Law class - April 2015 - California

2. If you would like copies of today’s
presentation slides:
www.slideboom.com
File Name:
Shull Payroll Law US CA
(C) 2011 Fred Pryor Seminars
PRESENTATION SLIDES

3. WHERE AUDITORS ARE LOOKING
I R S A N D S TAT E
U N E M P L O Y M E N T
1. Misclassifying
workers
1. 1099 MISC Forms
2. Form W-2
2. Taxable vs. Non-
Taxable Fringe
Benefits
D E P A R T M E N T O F L A B O R
1. Exempt vs. Non-Exempt
Employees
1. Overtime errors
2. Garnishments

4. Government Tools
Compliance Guides –
what the law says
Administrative Guides –
how the law works
Company Tools
 Employee Handbook –
what the law says
 Payroll Policies and
Procedure Manual – how
the law works
 Job Descriptions –
overtime or not? Contractor
or employee?
AUDIT TOOLS

5. PRESENTATION SLIDES
If you would like copies of today’s
presentation slides:
www.slideboom.com
File Name:
Shull Payroll Law US CA

7. EMPLOYEE OR CONTRACTOR? WB-1
Type Worker FITW FICA SITW FUTA SUTA
Common Law
Employee
X X X X X
Statutory
Employee
X X X
Statutory
Nonemployee
Contractor

8. IRS Test (pgs. 2 -3)
• Behavioral control
• Financial control
• Relationship of the
parties
ABC Test (pgs. 4 – 5)
• Absence of control
• Business is unusual
or away
• Customarily doing
business as an
independent
contractor
IRS TEST VS. ABC TEST WB PAGES 2 - 5

9. IRS SECTION 530 – SAFE HARBOR WB - 6
 Result of previous
IRS audit
 IRS ruling – use of
form SS-8
 Industry-wide
practice of long
standing

10. CONTRACTOR VS. EMPLOYEE RECORDKEEPING
WB: 7 - 9 AND 10-11
C O N T R A C T O R ( P G S 7 - 9 )
• Contract or PO
• W-9 (Form 8832 for LLC
filing as Corp.), or W-8
(foreign vendors)
• Proof of bona-fide
business
• Invoices
• 1099-MISC (if
applicable) or 1042-S
E M P L O Y E E ( P G S 1 0 , 1 1 )
• I-9
• W-4
• New hire reporting
• SS# verification
• Job description
• Payroll records

11. INVALID W-4 WB-10
xxxxxx 321 Any Street

12. VALID W-4
Jane S. Smith Jan. 15, 2015

13. VALID W-4
Jane S. Smith Jan. 15, 2015

14. SSN MATCHING – E-VERIFY WB-11
• Social Security Number verification is
suggested for all new hires after they are hired
and before they are scheduled to work
 www.ssa.gov – Business Services On-Line tab
 www.uscis.gov – E-verify tab

16. THREE TYPES OF DEDUCTIONS WB-12
Mandated
Statutory taxes
Railroad retirement contributions
State mandated disability and retirement contributions
Involuntary
Garnishments
Voluntary
Health insurance, S-T-D and L-T-D, union dues, 401(k), etc.)

17. COURT ORDER PRIORITY WB-13
1. Bankruptcy (unless Support Order or IRS levy is served first)
2. Support Order
3. IRS Tax Levy
4. Federal Student Loan (AWG)
5. Federal Non-tax debt (AWG)
6. State Tax Levy
7. State Student Loan
8. State Non-tax debt
9. Local Tax Levy
10. Creditors

18. FEDERAL LAW LIMITS – GARNISHMENTS
• Bankruptcy
• No limit
• Support – based on disposable pay
• 50% if there is a second family, 60% if there is not a second
family and 5% additional for arrearage. Once a child support is
taking 25% of more of disposable – you cannot honor a creditor
or student loan. CA is 50% of disposable
• IRS Levy – based on take home pay
• Calculation based on 668-W and employee actual income tax
deductions

19. FEDERAL LAW LIMITS – GARNISHMENTS
• Student Loans and non-tax debt – based
on disposable
• 15% - Federal (AWG)
• 10% - State only
• State and Local Tax Levies
• 25% of disposable or read the order

20. Creditor
25% of disposable or 30 times federal
minimum wage from disposable (as of 7/24/09
= $217.50 per week)
Many states set their own limits. CA is the
same as federal
Federal Law Limits – Garnishments

21. HOW THE CALCULATIONS WORK
TA K E H O M E PAY ( I R S )
• Gross minus:
• Taxes
• Existing voluntary deductions
• Child supports
• Equals Take Home Pay
• Less: 668-W Chart (this
becomes the net pay)
• Equals IRS Levy Amount
D I S P O S A B L E PAY ( A L L
O T H E R G A R N I S H M E N T S )
• Gross minus:
• Taxes
• Medical insurance premium (if a
medical insurance child support
order)

22. TAKE HOME PAY CALCULATION
Gross: $750.00
Less: ( 85.00) – FICA/Fed With
( 15.00) – State Withholding
( 45.00) – Medical Ins.
( 25.00) – 401(k)
THP: $580.00
Less: (275.94) – 668-W Chart
Levy Amt: $304.06 – Amt. to deduct from wages

23. Illustration Of Disposable Pay For General
Garnishment***
Employee earns $500 per week
Withholdings: • Disposable Pay/Earnings:
FITW $75.00 Gross Pay $500.00
FICA $38.25 Taxes (133.25)
State W/H $20.00 Disp. Pay $366.75
Medical Ins $55.00 (30 x $7.25) (217.50)
401(k) $50.00 $ 149.25
Limit (25%) $91.69
Limit (10%) $36.68

24. ILLUSTRATION OF DISPOSABLE PAY FOR CHILD
SUPPORT – MEDICAL SUPPORT
Withholdings:
FITW $75.00
FICA $38.25
State W/H $20.00
Medical Ins $55.00
401(k) $50.00
Disposable Pay:
Gross $500.00
Taxes (133.25)
Medical Ins ( 55.00)
Disp. Pay $311.75
Limit 50% $155.88
Limit 60% $187.05

25. Employee Owes:
1st - $100.00 =
28.5%
2nd - $100.00 =
28.5%
3rd - $150.00 = 43%
Total $350.00
Limit = $155.88
28.5% = $44.43
28.5% = 44.43
43% = 67.02
Total $155.88
PRO-RATION FORMULA

27. BASICS OF FAIR LABOR STANDARDS ACT (FLSA)
I N C L U D E D I N F L S A
Minimum Wage (states
may set a higher rate)
Overtime requirements
Recordkeeping
requirements
Child Labor Laws
Equal Pay
E X C L U D E D F R O M F L S A
( M AY B E S E T B Y S TAT E
L AW )
Paid benefits (e.g. vacation,
sick, personal time off)
Breaks – lunch and rest
Frequency of pay
Restrictions for children
workers
WB-15

28. EXEMPT CLASSIFICATIONS WB-16
Federal Salary Requirements
$455 per week – guaranteed
Categories:
 Executive (pg 16)
 Administrative (pg 20-21)
 Professional – some are paid on a fee basis (pg 17-18)
 Highly Skilled Computer Professionals – may be paid hourly or
salaried (pg 19)
 Outside Sales – no salary requirement (pg 25)

29. California Exempt Salary Criteria
 Must be paid two times state minimum wage based
on 40 hours – no reduction allowed for part-time
exempt
 Must have guaranteed monthly salary (July 1, 2014 -
$3120 – approx. $720.00 per week)
 Pharmacists and registered nurses are not eligible
for professional exemption

30. EXECUTIVE EXEMPT REQUIREMENTS
• Run a recognized portion of the company
• Ability to hire, terminate, change policy,
set budgets, make decisions, etc.
• Supervise 2 or more full-time persons or
the equivalent of
WB-16

31. PROFESSIONAL EXEMPT REQUIREMENTS
WB-17 & 18
• Learned Professional (WB 17)
• Advanced knowledge in a recognized
professional field
• Impart knowledge
• Use discretionary judgment
• Creative-Artistic Professional
(WB 18)
• Use of creative and artistic abilities
• Cannot be told how to create the work

32. HIGHLY SKILLED IN A COMPUTER-RELATED
OCCUPATION WB-25
• Pay Option
• Salary (at least $455 per week) or
• Hourly rate of $27.63 an hour
• California Pay Option:
Hourly rate $40.38 (effective 1/1/14)
Salary – no less than $84,130.53 annually or $7,010.88 per
month
• (see http://www.dir.ca.gov/dlse/LC515-5.pdf)
• Computer programmers, designers of computers and system
analysts
• Does not include: computer operators, repairpersons,
technicians, data entry or help desks

33. ADMINISTRATIVE EXEMPT REQUIREMENTS WB 20-21
• Office or non-manual work pertaining to
general business operations. Work of
substantial importance with higher learning
or experience.
• Limited powers of responsibility, authority
and influence.
• Must report directly to another exempt
employee

34. EXAMPLE OF ORGANIZATIONAL CHART
Director of
Accounting
Executive Exempt
Accounts
Receivable Mgr
Admin. Exempt
A/R Clerk
Non-Exempt
Accounts Payable
Mgr.
Admin. Exempt
A/P Clerk
Non-Exempt
Payroll Mgr.
Admin. Exempt
Payroll Clerk
Non-Exempt
Controller
Professional
Exempt
Executive
Secretary
Non-exempt

35. 50% RULE
• No more than 50% (20% if
governmental agency) of any workweek
can be spent doing non-exempt type
work.
• Clerical, manual labor
• Routine, repetitive, directed-type work
• What you pay a non-exempt employee to do

36. EXEMPT EMPLOYEE PAY REQUIREMENT WB 22, 23, 24
An exempt employee must receive
the same amount of pay per
workweek regardless of the number
of hours they work or the quality of
their work
(§29 CFR 541.118 and .602)

37. APPLICATION OF PRINCIPLES TO ESTABLISH
“PHYSICAL HOURS WORKED” WB 26
• Minimum wage requirement
• Overtime requirement for hours physically
worked over 40 in a workweek
• Requirement to keep an accurate time record
• Meal/Rest Break Rules
• Suffered or permitted rules

38. SALARIED NON-EXEMPT –
PURPLE SQUIRREL
Can be paid fixed or fluctuating
◦Pay fixed when: employee’s schedule is a fixed
schedule and rarely has overtime
◦Pay fluctuating when: employee’s schedule will
always fluctuate and almost always has overtime
– but you never know how much
Must keep a time record
WB-27

39. SALARIED FIXED CALCULATION
Jim works 48 hours one workweek. His
salary is $3000 per month
$3000 x 12 = $36,000
$36,000 ÷ 52 = $692.31
$692.31 ÷ 40 = $17.31
$17.31 x 1.5 x 8 = $207.72
$692.31 + $207.72 = $900.03

40. SALARIED FLUCTUATING CALCULATION
Jim works 48 hours one workweek. His
salary is $3000 per month
$3000 x 12 = $36,000
$36,000 ÷ 52 = $692.31
$692.31 ÷ 48 = $14.42
$14.42 x .5 x 8 = $57.68
$692.31 + $57.68 = $749.99
Must be stated in the job
description and employee must
sign an agreement to be paid
this way.

41. SALARIED FLUCTUATING CALCULATION
Jim works 48 hours one workweek. His
salary is $3000 per month
$3000 x 12 = $36,000
$36,000 ÷ 52 = $692.31
$692.31 ÷ 48 = $14.42
$14.42 x .5 x 8 = $57.68
$692.31 + $57.68 = $749.99
Must be stated in the job
description and employee must
sign an agreement to be paid
this way.

42. NON-EXEMPT BASICS WB-PAGE 26 - 32
Minimum wage requirement
California minimum wage increase to $9.00 on
July 1, 2014.
Effective January 1, 2016 – minimum wage will
increase to $10.00
• Meal/Rest Break Rules
• Suffered or permitted rules

43. California Basic Overtime Law
• Any hours over eight to be paid at time-and-a-
half
• Any hours over 12 to be paid at double time
• Seventh-day premium pay – the first eight
hours worked on the seventh day of work in
any one workweek; double time for any work
in excess of eight on any seventh day of the
workweek (Does not apply if employee did not
work entire week)

44. Alternative Workweek Rules
 Secret ballot vote
 2/3 majority
 Submitted and approved by DLSE
 No coercion allowed
 Maximum 10-hour days (exception:
hospitals, residential care industry)
 “Regularly scheduled” workweek required

45. FEDERAL MEAL/REST BREAK RULES
If the employee is offered a meal break – they
must have 30 minutes uninterrupted as
unpaid. If they get interrupted during the
30 minutes, they must be paid for the whole
30 minutes.
If the employee is offered a rest break – all
rest breaks of 20 minutes or less must be
paid rest breaks

46. California Meal/Rest Break Rules
 An unpaid 30-minute meal break must be
provided to employees who work over five
hours. However, if work time is less than 6
hours, the employee may voluntarily waive
the break time.
 Employees must be given a paid 10-minute
work break every three and a half hours.
 7 day premium rule applies for maximum
hours worked.

47. Make-Up Time
• Must be requested by employee in writing in
advance (each occurrence)
• Time must be made up in same workweek it is
requested off
• Employee may work up to 11 hours in one day
or 40 in a workweek without overtime
• Employer cannot “encourage” or “solicit”
make-up time

48. LECTURES, MEETINGS AND TRAINING
PROGRAMS WB-28-30
Not counted as working time (must meet
all four requirements)
1. Attendance is outside the employee’s regular working
hours
2. Attendance is voluntary
3. The course, lecture or meeting is not directly related to
the employee’s current job.
4. The employee does not perform any productive work
during such attendance.

50. PRIZES, AWARDS, GIFTS AND BONUSES
WB 34 - 35
• Cash – taxable
• Gift Certificates – taxable
• Tangible Property – nontaxable if de minimis
• Achievement Awards (page 39)
• Safety or Length of Service (5 year increments only)
• Tangible property only
• Up to $1600 – non-taxable if qualified plan
• Up to $400 – non-taxable if non-qualified plan

51. WITHHOLDING METHODS WB 36
• Regular Wages
• Wage-bracket method
• Supplemental Wages
• Anything other than normal paycheck (overtime, sick pay,
prizes, commissions, bonuses, etc)
• Percentage method (flat-rate percent of 25%)
• Aggregate/Cumulative method

52. SAMPLE CUMULATIVE METHOD
Example 1
You pay John Peters a base salary on the 1st of each
month. He is single and claims one withholding
allowance. In January he is paid $1,000. Using the wage
bracket tables, you withhold $51 from this amount.
In February he receives compensation of $1,000 plus
overtime of $450.00, which you combine with regular
wages and do not separately identify.
You figure the withholding based on the total of
$1,450.00.

53. SAMPLE AGGREGATE/CUMULATIVE
METHOD
Example 2
You pay Sharon a base salary on the 1st of each month.
She is single and claims 1 allowance.
Her May 1 pay is $2,000. Using the wage bracket
method you withhold $190 according to tables.
On May 14 she receives an annual bonus of $1,000.
Using the aggregate/cumulative method you withhold as
follows:

54. SAMPLE AGGREGATE/CUMULATIVE METHOD
Example 2 (continued)
1. Add the bonus amount to the amount of wages from the
most recent base salary pay date ($2,000 + $1,000 =
$3,000)
2. Determine the amount of withholding on the combined
$3,000 using the wage bracket tables ($340.00)
3. Subtract the amount withheld from wages on the most
recent base salary pay date ($340 - $190 = $150)
4. Withhold $150 from bonus payment

55. SAMPLE PERCENTAGE METHOD
Example 3
Using the same facts as Example 2, you withhold
using the percentage (flat rate) method.
You would withhold 25% of $1,000 e.g. $250
from bonus payment

56. GROSS UP EXAMPLE
Net pay is $500
Federal flat rate 25%
State flat rate 5% (example only)
FICA and Medicare 6.2% + 1.45% = 7.65%
100 – 25 – 5 – 7.65 = 62.35%
$500 / 62.35% = $801.93

57. NON-TAXABLE EMPLOYEE EXPENSE
REIMBURSEMENT – ACCOUNTABLE PLAN WB-38
• Accountable expenses
• Must have receipt
• Show business connection
• Non-Accountable expenses
• Per Diem Allowance – varies from city to city – see pub. 1542
• Mileage reimbursement up to 57.5¢ (Jan. 1, 2015)
• De Minimis up to $75.00**
• Most Allowances are taxable

58. Tuition Expense Reimbursement –
Pub 970 (updated 1/19/2011)
 Up to $5,250 per year
 Does not have to be work-related
 Graduate or Under-graduate level
 To be used for: tuition, fees, books and other
similar expenses
 If considered “working condition fringe” –
unlimited amount

59. No-Additional-Cost Service
 Services offered for sale to customers in
ordinary course of business of the
employer in which the employee is
performing services
 Employer incurs no substantial additional
cost in providing service to the employee
 Take lost revenue into consideration when
determining whether substantial additional
cost is incurred

60. Qualified Employee Discounts
 Discount given to employees on qualified property that does
not exceed profit margin, or on qualified services that do not
exceed 20% of the price offered to customers
 Qualified property or services - personal property or services
provided to customers in the ordinary course of business
 Does not include real property or personal property held for
investment
 “Employee” includes current and former employees who left
because of retirement or disability, and their widow(er)s,
spouses, and dependent children
 Company discounts must be followed if the employee is
highly compensated (see Notice 2007-87, 2007-45 I.R.B. 966)
 Qualified employee discounts must be provided on a non-
discriminatory basis

61. Working Condition Fringe
• Property or service provided to an employee
to the extent that, if the employee paid the
expense, it would be deductable under IRC
Sec. 162 or 167
• The term “employee” includes a current
employee, partner who performs services,
director, or independent contractor

62. Club Dues
 Special rule for club dues disallows a business
deduction for membership dues paid to a club
organized for business, pleasure, recreation, or
other social purposes:
• Country clubs
• Golf and athletic clubs
• Airline clubs
• Hotel clubs
• Clubs operated to provide meals under
circumstances that are not conducive to business
discussion

63. Qualified Transportation Fringe
• Only employees: The definition of employees in this context does not include
partners, independent contractors, or 2% shareholders of an S corporation
• Transportation in a commuter highway vehicle between the employee’s
residence and place of employment
• Transit pass, voucher, token, fare card, or reimbursement for them by the
employer
• Qualified parking
• 2015 exclusion from wages:
– $130 per month for combined commuter highway vehicle transportation and
transit passes
– $250 per month for qualified parking
• Benefits more than the limit: If the value of a benefit for any month is more than
its limit, include in the employee’s wages the amount over the limit minus any
amount the employee paid for the benefit

64. Qualified Moving Expense
Reimbursement
 Expenses that would be deductible under IRC Sec. 217
if incurred by the individual
 Must meet time and distance tests
 Cost of moving personal belongings and traveling to
new location only; no meals and temporary lodging
 Brokerage fees, property taxes, insurance, etc., are
taxable wages

65. EMPLOYEE LOANS PAGE 41
Loans in the amount of $10,000 or more
without interest charged at applicable
federal interest rate – difference in rate is
taxable
Subject to FICA/Medicare and unemployment taxes
Not subject to federal or state income tax
Forgiven loans are fully taxable

66. MILITARY PAY PAGE 42
Supplemental Military Pay
Compensation paid to employees while on military duty
that represents the difference between employee’s
regular pay and the pay provided by the state or federal
government.
Temporary assignment – FITW, FICA, Medicare and
unemployment taxes
Indefinite assignment - 1099-MISC (over $600)

67. ACCURATE W-2 REPORTING
PAGES 43 - 45
Payroll Compliance Logbook
Deposit and Remittance Log
Spreadsheet with compilation of each pay period
Total for the quarter – match to 941 reporting
Total for year – match to W-2

68. DEPOSIT AND REMITTANCE LOG EXAMPLE
Pay
Period
Total
Wages FED With EE FICA State With
Local
With ER FICA
Total
Remittance
for Federal
Date of
Remittance FUTA SUTA Comments
1/15 75,320.00 18,076.80 5,761.98 3,012.80 753.20 5,761.98 29,600.76 1/16 2,259.60 753.20
Transposed
numbers on
deposit.
Corrected on
2/16
1/31 76,558.24 18,373.98 5,856.71 3,062.33 765.58 5,856.71 30,087.39 2/1 2,296.75 765.58
2/15 73,449.34 17,627.84 5,618.87 2,937.97 734.49 5,618.87 28,865.59 2/16 2,203.48 734.49
2/28 76,480.19 18,355.25 5,850.73 3,059.21 764.80 5,850.73 30,056.71 3/1 2,294.41 764.80
3/15 72,589.37 17,421.45 5,553.09 2,903.57 725.89 5,553.09 28,527.62 3/16 2,177.68 725.89
3/31 74,392.68 17,854.24 5,691.04 2,975.71 743.93 5,691.04 29,236.32 4/2 2,231.78 743.93
Totals $448,789.82 $107,709.56 $34,332.42 $17,951.59 $4,487.90 $34,332.42 $176,374.40 $13,463.69 $4,487.90
Date of
Remittance 4/5 4/5

69. PENALTIES FOR NON-COMPLIANCE
For amounts not properly or timely deposited,
the penalty rates are as follows:
2% - Deposits made 1 – 5 days late
5% - Deposits made 6 – 15 days late
10% Deposits made 16 or more days late.
10% - Amounts (that should have been deposited) paid
directly to the IRS or paid with your tax return
15% Amounts still unpaid more than 10 days after the
date of the first notice the IRS sent asking for the tax due
Plus interest compounded daily

70. SURVIVE AN AUDIT: SHOW A
“PATTERN OF BEING IN COMPLIANCE”
Tools to show compliance:
* Administrative and Compliance Guides
* Payroll Policies and Procedures Manual
* Payroll Compliance Logbook
* Record of on-going Training

71. Seminar Disclaimer
This seminar is from an auditor’s point of view. It is possible your
company attorney may disagree with our interpretation. That is
okay. It does not mean we are right or that we have given you
wrong information. You may have an exception to the rule that
your attorney knows about.
IRS CIRCULAR 230
Any tax advice included in this written or electronic
communication was not intended or written to be used, and it
cannot be used by the taxpayer, for the purpose of avoiding any
penalties that may be imposed on the taxpayer by any
governmental taxing authority or agency.