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Archive for October 6, 2017

Classification Audit Reviews—Forget About It!

That’s what most small businesses think when you mention the subject. Today, get out your checkbook and start writing them to the local Department of Labor workers’ compensation fund. This could be the Washington State Department of Labor and Industries AND the Federal Department of Labor if you have been reading articles in the Puget Sound Business Journal and Wall Street Journal lately. Scary stuff.

Classifying Bookkeepers and Accountings

The most thought bookkeepers, accountants, and payroll companies give to reviewing your classifications assigned to your business is: none. That is your responsibility by State and Federal law. You tell the accounting folks who worked, how many hours, and how much to pay, and they send in the quarterly report. Not that simple anymore.

Boutique for Small Business—WC Reporting

Classification audit reviews are becoming the vogue for small business to keep solvent. Now, they have to be reviewed every year to keep up with the changes in the reporting requirements. The assessed amounts by the government can put you instantly out of business. Most small businesses learn by word-of-mouth how to keep the books. Unfortunately, bookkeepers and accountants are not trained on employer workers’ compliance issues; only employee HR (human resource) state and federal compliance issues.

Case in point: Employers and independent contractors from all industries send time records for quarterly workers compensation reports never knowing if they are in compliance. Recently, the fifth largest payroll company in America was asking what the difference between employer and employee compliance reporting was. They did not have a clue.

The two new federal programs you have been hearing about are targeting employers who have misclassified their own employees and who have issued 1099s to independent contractors. They claim this misclassification is used to avoid paying payroll taxes on people who should be employees or covered workers. These programs are the Voluntary Classification Settlement Program to submit 10% of the normal payroll taxes for one year with a gratis for three years; and the new IRS 1% amnesty program for misclassifying employees. The latter may not be a good thing with the IRS probably sharing your information with other agencies according to Mike Reilly at Lane Powell in Seattle.

Redefinition of Independent Contractors

The state of Washington rethought the qualifications for independent contractors by reinterpreting RCW 51.08.180 Definition of Worker knowing full-well most one-person contractors are terrible record keepers. Thus, they fail the famous Six-Part Test under RCW 51.08.195 and RCW 51.08.181(for building trades).

When I was working for the Department, if a building trade’s person was licensed and bonded, he was independent. Not true today. The worst part is when a contractor had no idea he was an ‘unregistered employer’. The penalties are severe since most workers’ compensation funds are underfunded because pre-2005 building premiums are just not there anymore.

In April 2009, the Washington State Attorney General’s Office issued an Employer Services Overview paper declaring conditions of personal labor. It mirrors the California Labor Law stating that out of necessity or choice others were employed to do all or part of the work. In other words, an independent contractor better get a workers’ compensation account opened yesterday to remain independent.

Bookkeeper or boots-on-the-ground premium auditor?

As a certified fraud examiner and ex-contractor, there is very little difference by the time tax season comes around for saving disposable income to the independent contractor. I am sure this is true with the unscrupulous employer; but for the uninformed honest small business, they do not have anywhere to turn to find expert advice to conduct an annual classification audit review.  Most building associations do not have a true ‘audit department’. And most accounting firms just hand over the past history to the auditors not thinking about any compliance issues involved.

That is my point: classification non-compliance. It can be as simple as having a salaried 20 hours a week person working part-time with no time card. If audited, that company will pay premiums on the other 20 hours plus a 20% penalty. In addition, there are insufficient records penalties equal to $1000 a year, and if the auditor has to make dollar quotas, they can add on a misrepresentation penalty up to ten times the premium amount. I kid you not.

So, do yourself a favor. Find a competent classification audit reviewer each year to keep up with the changes in federal and state compliance workers’ compensation reporting. You will stay in business much longer.

For more information, contact Ted Carlson at Liberty Bay Consultants, LLC—a Certified Fraud Examiner specializing in workers compensation compliance reporting and audit representations!

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