By: Derek Wiggins, Manager, UHY LLP
Payroll taxes are often complicated for companies with stable and settled workforces; staffing companies have all of the same issues as traditional employers, but with higher volumes and with additional technical issues. While there are no easy solutions, below are some issues to be aware of and ideas on how to deal with them.
One of the first issues you will deal with is at the beginning of the hiring process: are the people you are paying employees or contractors? This may seem like an easy question, but it often is not. The IRS has identified 20 factors to consider in making the decision. Many states are cracking down on employee misclassifications. If you have employees, then you will have employer payroll taxes, which will affect your costs. Understanding this will help you price your work correctly and to avoid penalties, fines, and other annoyances that come with correspondence from state and local agencies.
What Happens if You Are Contacted by a State or Local Government
If you do get contacted by a state or local government agency, it is important that you address the correspondence in a timely manner. Some notices have deadlines to respond to, and if that time passes, there may be additional costs and fewer options on how to address it. Be careful in responding. While you obviously want to be truthful, there are many words that have one meaning in their common usage, but may have a special meaning in tax, that is different. Providing more than you intended or other simple miscommunications can be costly.
Avoid Being Contacted by a State
A way to avoid being contacting by the state is to register when and where required. With how fast things move in the staffing world and the changing nature of how and where people work is becoming increasingly complicated. States are still struggling to address these changes and their solutions are not uniform. Once you determine you have an obligation to file in a state, registering may not be simple as many states have separate registrations to be completed with their Secretary of State, Department of Labor, and Department of Treasury or Revenue. Keeping accurate records and making sure your accounting team is aware of when you have employees or customers in a new jurisdiction will help you maintain compliance. Once you have registered and begun to collect sales tax or withhold payroll taxes, it is important that you remit these as it is viewed as theft to collect the governments money and not remit it. The cost of compliance might be high, but the cost of non-compliance may be higher.
Hopefully the information above will help you properly classify workers, respond timely to communications, be careful in how you communicate with taxing agencies, and properly register when required. Knowing these issues will help you avoid mistakes. However, if you are already experiencing issues, there are ways to move forward. If you are having an issue or suspect there may be problems, it is always best to address these as soon as possible with your CPA or an attorney.