BY HARLAN S. KAHN
Are employers a group of criminals under interrogation? If I were a reporter, that’s how I would open my interview with some of the auditors from the New York State Department of Labor (NYSDOL).
NYSDOL auditors ask pointed questions looking to catch some wrongful act where they look to impose a fine or penalty. A lack of understanding can land you with a couple of bills or a trip to court, and if you did some wrong things, you can pay a hefty price.
NYSDOL can also refer your case to the worker’s compensation board, the income tax unit, criminal investigations or other government agencies.
Here’s a 2017 case that came to my office: A restaurant owner had what he thought was a great idea. The expensive payroll service they were using was about to cancel and they were supposed to sell the restaurant “any week.”
So they decided to pay everyone as a 1099 outsider instead. The plan had a time frame of “only until the sale.”
But what is the NYSDOL looking for during their audits? Auditors want to see overtime recorded and paid to employees; they want to see that the employees with time cards have been paid properly; and they want to see that salaried employees haven’t lost overtime due to them.
Lastly, they want to see the job descriptions of all employees who receive a 1099.
The onus of proving your 1099-paid people are self-employed falls on the businesses, and therefore to the owners of the business and those signing checks or tax returns and making major decisions.
To my amazement, most business fail to get the necessary data before issuing checks to recipients. A sole proprietor, S or C corporations, limited liability companies, and partnerships are all required to get information from people who work for you in any capacity before, you write them checks.
To satisfy NYSDOL that your 1099s are self-employed you will need a business card (or retain a copy of their website) and a bill or invoice for each check you wrote the person. Agreements or contracts signed stating terms is nice, but not required for NYSDOL purposes.
Remember the restaurant case with the payroll and 1099 problem? They finally sold after 13 weeks of having all employees on straight check with no taxes whatsoever taken out. That’s a problem!
What do you think will happen when high school and college kids get a W2 and a 1099? What if the payroll service doesn’t send W2s for lack of payment? What kind of questions will be asked?
Did you know you are personally liable for payroll taxes and withholding?
I was able to convince the owners after selling the business to re-open payroll service and add back all the payroll checks written improperly. The business paid the payroll taxes, only W2s were sent to employees, and I haven’t heard a thing since.
We can all sleep at night knowing there isn’t anything to find now that it’s fixed and closed before year’s end.
Harlan S. Kahn is a CPA and a profitability consultant with Paris Accounting Corp (ParisAC.com) in Bayside, and author of Fix the Tax Code Please. He earned his accounting degree from Queens College in 1986, has lectured for the IRS, Queens LIBOR, National Allied Professionals, and others.
As a profitability consultant, Kahn has a different approach to client relationships. “We help select clients make more money, improve their quality of life, and increase the market value of their business,” Kahn says.
“It is very rewarding to plug profit leaks for customers, bring in new lines of revenue and point our clients into a direction to achieve their goals and aspirations,” he added. “Oh, and we do taxes!”