Transporation Carriers Are Easy Prey for State and Federal Audits

Who are these ‘transportation carriers’? Just about anything with tires. We are talking about bicycles, parcel delivery companies (sole, LLC, and Dispatchers), inter-modal, intra-state, and inter-state.

The assault on these independents by State and Federal agencies has been relentless. The federal perpetrators are the Department of Labor using IRS filed 1099s to ferret out these unregistered employees and employers looking for payroll taxes.

Did you read this week about the Social Security Administration getting legal permission to withhold tax returns from citizens because some legislator in the Senate added an amendment to the Farm Bill eliminating the ten year statute of limitation? Talk about fleecing the constituent. This is not a business friendly government anymore unless you have deep pockets.

It’s okay; I can say this because I got audited last year for my consulting business that defended small firms being audited by the Sate of Washington. Might have to do with my whistle blowing case and getting a manager transferred….Anyway, the IRS was looking for 1099 programmers at my TIME Integrator business. There were none; all the programmers were employees.

Now Back to Business

The ‘qualifications’ for sole props and others doing business as LLCs are many. From the Statue’s seven to twenty-one point tests that change every year by the Federal  bureaucrats and State legislatures, it is amazing if there is anyone able to deliver parcels, packages, and freight.

Here are some catch 22s: A FedEx operator (an independent) has his own contract. One of his friends wanted to work for FedEx but did not meet the financial requirements in the contract. So being a nice guy, he fronted for him and ended up with three other ‘franchisees’.

What he did not know, is that under Washington State Department of Labor and Industries regulations, he was their employer even though FedEx signed them up.

Here is another: One of the big national interstate freight forwarding companies was going to be audited because they were independent operators only with that one company. To work within the legislative guidelines, I educated the drivers on how to be in compliance.

All they had to do was open up a Labor and Industries account and exempt themselves as the owner of the truck if they did not want any workers compensation coverage. Then, hire a kid to wash the truck or help him with the freight occasionally and pay those premiums.

You can wrestle with the government because you will not win. Ask that guy in Nevada with the traumatized cows.

IDAHO — A Land Governed by Its Citizens—Not the Federales

Idaho is similar to several Southern States in that it self-governed. All a company has to do is buy a workers’ compensation policy and pay taxes for unemployment insurance. Don’t forget the State payroll taxes, too. Seems simple enough.

The problem is companies living in Spokane or Twin Falls crossing the State line doing business in both. Dependent upon a few factors, reciprocity has be used to pay the lowest premiums. For employees and independent contractors, time and risk class documentation is paramount to avoid paying workers’ compensation premiums in both States.

A bigger problem is the accounting that is never reconciled with the either the workers’ compensation or unemployment taxes forms. States query these two reports for prospective audits. The WC policy should be integrated with the UI tax form to ensure compliance and avoid these audits. Using Excel sheets is very risky because of a 7% chance of transcription errors.

How do you accomplish this? Simple. Use our compliance calculators for employees, independent contractors, and prevailing wage projects that produce all the accurate reporting you will ever need. By the way, they date stamp all historical data entered to be used for cost analysis, future job bidding, and keeping the insurance company auditor honest.

Workers’ Compensation Insurers May Be the Next Target for Federal Regulation.

Already there have been discussions about the federal government taking over the workers’ compensation industry just like health care. The result would be the same as it is today with unsupervised bureaucrats dictating a program no one can control.

A typical example is a major national workers’ compensation company writing policies in many States. I worked for one of their energy clients who was to keep track of engineers and project managers roving around different States overseeing their wind farms. Each state has its own rules and regulations on how to use its risk classifications codes.

The underwriters used NCCI risk classifications in some states and in others they assigned State codes. But in no event did the insurer have subcategories to save the client premiums—just the four digit code. Also, there was no tracking of the personnel in different states to take advantage of Reciprocity. Premiums were paid on the same personnel working in two States at the same time. When you add the fact some personnel lived in one state and worked in others, it gets complicated.

As long as insurers have no date stamped evidence tracking times and locations for roving personnel in different risk classifications, their audits can get ugly. So, it is up to the client to track the insurer otherwise penalties will be assessed on estimated hours and locations.

Another example is a manufacturer in Utah shipping personnel and cabinets to be installed in Washington State. The company did not keep track of the installer hours and ending up paying premiums in both States.

PRJC Project Compliance Calculator

Last week we talked about of risk classification assignment data using our PRJC Project Calculator. We did not tell about different States using different codes. No worries.

You can use contract employees as long as they are licensed and/or bonded. If necessary for compliance issues, refer to our CONCalculator program to get all the information required to hire this subcontractor including their FEIN.

When an employee (or subcontractor) hires on, they must be assigned with different classifications that apply to their work per record keeping requirements dealing with multi-classifications in the different States. Reciprocity can be ‘programmed’ in to trigger  any duplicated efforts to save your clients money.

Enter the Pay Rate and any Fringe Rate assigned to this Project. This is usually provided by the Prime Contractor where you are going to work. Workers’ Compensation requires a form with the Hire Date and Release Date for compliance.

After the Employees are in the program, you can edit them from the Employee/Subcontractor Report. If you wish to remove any of these records, you can use the editing feature on Employee/Subcontractor Report by placing RELEASED in the Release Date.

My point is that the program is completely flexible to meet any compliance insurance requirements and can be integrated, too.

If national insurers started tracking this data now, there would be no need for a national workers’ compensation federal program in the future.

Why Don’t Human Resource Folks Have Integrated Servers?

A couple of years ago, I was nominated by a board member of Seattle Executive Association to become a member. Everything went fine until a TPA humans resource claims business objected because he said he did the same thing we did reporting workers’ compensation premiums.

When I confronted him, he apologized after learning his whole business was employee orientated and our firm handles employer compliance issues. What I learned was the words and language are the same; the use and meaning were entirely different.

I mention this because it has been a continuing process educating an established line-item industry to start protecting their employer clients. HR and Third Party Administrators do not back up any risk classification compliance data.

HR is the consolidator of payroll information, claims information, and should have access to a server for risk compliance information. When this is done, queries mean something to ensure compliance audits have been attested.

It is not that difficult to integrate all these departmental programs. Try it.


Now, back to CONC at TIME Integrator

When adding independent contractor hours, the Timesheets are used to verify and record the hours in a 4-step process to secure accuracy. But before we do that, I would like to explain the importance when you print the Timesheet.

First of all, the Timesheets can be customized to fit your company’s way of doing business. No two companies will use this program the same.

By first identifying the Pay Period dates and reporting quarter, you can use the pull down menu to identify the contractor and his/her classification number to print out his Timesheet. If this contractor is to be reported in more than one classification, you print out those different Timesheets for his signature.

Use the Comment field for reminders, assigning working locations, or anything else you can think.

You can place the units and hours in any box to fit your way of doing business to conform to correct record keeping requirements. Units must be captured for square foot of sheetrock, number of roofing squares, siding, windows installed, framing square footage, concrete yards or square foot laid, etc.

The REIMBURSEMENT area is for capturing materials or meals paid so that this is not considered labor. Any BONUS amount is placed here for the same reason.

In order to be in compliance, independent contractors (subcontractors) must report hours worked. For example, a commissioned independent contractor salesperson’s hours should be recorded at 8 hours per day, or your firm will be subject to penalties including capturing this person as a full time employee estimated at 160 hours per audit guidelines.

Piece work units and hours will be recorded as a standard record keeping reporting requirement. An Average Hourly Wage will be used to estimate hours if there is no signature on this Timesheet from the amount paid. Usually, this ends of doubling the premiums and taxes.

When the signed Timesheets are returned, PAYROLL will use these sheets to Add Contractor Hours for regular hours, authorized payments, units, and any reimbursement and/or bonus payments.  Accounts Payable will reimburse the contractor with the proper documentation with separate checks for reimbursements and bonuses.

Make sure everyone signs these legal documents as to the true hours worked including the piecework and special industry independent contractors. State regulations state you have to print and get a signature on the Add Contractor Hours timesheet per record keeping requirements. This will help during audits to prevent estimated hours and excess penalty taxation.

Why Can’t Accounting Programs Integrate NCCI Risk Classification Compliance Coding?

First, you are going to say it’s already being used to do the quarterly reports. No, it is not. Compliance coding is having ‘triggers’ programmed into the risk classification accounting programs. This ensures companies are reporting accurately in any industry.

Like any fraud control, it attests to the accuracy of the originating data at the entry point whether it be time clocks, time sheets, hand held devices, or human data entry.

A lot of accounting programs have Add-ons that export to quarterly reports. Ever heard of GIGO? Garbage in/garbage out. These programs fail the compliance test. For example, Johnny can’t work in the office or maintenance yard and go out into the filed the same day. When audited, all these hours will be captured in the highest risk class.

Ever herald of Avalara in Seattle on Bainbridge Island? They do this for sales and use taxes all over America. We can do that for workers’ compensation, unemployment insurance taxes, and all the varied benefit funds in each State, too. Why pay for annual audits when you can do them yourself.

Attestation Software can has had Pay-as-U-go programs in place for several years. They have given away over 500 iPhone apps that export this work via APIs and emails to whoever needs this person, the risk classification, and times on the job. It works great for piece work, too.


Now, back to EMPC at TIME Integrator

When adding employee hours, the Timesheets are used to verify and record the hours in a 4-step process to secure accuracy.

Step 1 is to verify the Pay Period, Quarter, Pay Category, Employee, and Classification. If this employee buys materials or is paid a bonus, that information needs to be captured using the drop down menu so that these dollars are not considered wages. Remember, you may have more than one Classification for an employee such as warehouseman and driver, or remodeler and concrete work.

 Step 2 is to enter the hours and verify the written signature. These hours are propagated into the reports from this page. The Check box is to do the math. Then go to Step 3 by clicking the Save & Next box. If you are reporting salary employees, you still have to use an hourly wage in the program for compliance purposes. If the hours vary each month, divide the employee’s wages by the hours worked that month for the Rate of Pay using Combine Employee, Class & Rate. Otherwise, use the same hours for this salary employee each pay period.

 Step 3 is an open format to record regular and overtime hours that end up on the quarterly reports. Sick or medical, Holiday, and Vacation hours are recorded here. Many companies have their own method of paying these types of hours. This is where bookkeepers and accountants capture these hours to enter into their payroll programs.

 The Save & Next box leads you to Step 4 which is a summary of your input for one last verification. Use the Refresh, Back, and Retry buttons to make any corrections. Reimbursements and bonuses are handled independently, but need to be recorded and signed for audit purposes.

The program formulas mathematically calculate workers’ compensation, unemployment insurance, and benefit funds for each State. All you’re quarterly reporting just got done. Next week, we will see what automatic quarterly reports have been created.

Prime Contractors Gaming the System Passing Along Their WC Liabilities: Carpet Installers

You may have figured out from my Tweet and Linked-In comments today, I have a pet peeve against workers’ compensation and unemployment insurance auditors that look the other way when told not to prosecute fraudulent prime contractors.

One simple reason is the quotas the auditors have to maintain to keep their jobs. So, the easiest targets are sole proprietors and LLC partnerships. They don’t keep accurate records, have not a clue as to their compliance reporting requirements, and are surviving in the underground economy.

One such case was for Sasha’s Carpet Service LLC. He thought having friends becoming partners would keep him from paying workers’ compensation premiums. But in 2008, Washington State revised their definition of an independent contractor to include small companies working for one prime contractor. All the LLCs went back t sole props.

How this revision worked for the Sasha was to pick to up the carpet, linoleum, tile, etc. in his van and then his former partner buddies would jump into the truck when it left the prime contractor’s warehouse. Sasha became an Unregistered Employer. Remember, this is piece work compliance. His records showed he was making $60/hour when the norm was $3.00 a yard installed.

But according to the 2008 independent contractor revision, Sasha should not have been audited. The prime contractor distributor should have been audited for hiring covered workers. This particular national prime contractor did not have installers or salesmen—just office employees. I picked up some business cards at their warehouse that were blank except for the salesmen to write in their names above a line that said ‘Customer Representative”.

Poor Sasha got fined the usual $8000 for a one year audit. By the time I found all the underground installers working for the ‘coyotes’, I tried to assess the prime over $3,000,000. This audit was buried. Something to do with campaign contributions was my guess.

To be an underground independent contractor, there are still ways to work with the ‘system’. One is simply to work for more than one distributor or prime contractor. Another is to have a workers’ compensation account and pay for any occasional helpers.

Call us if you need some advice or want to know more.

In the meantime, keep track of our ‘partners’ using this FREE iPHone device:

CALIFORNIA State—Payroll/Remuneration Tables the CA Labor Law

Attestation Software has analyzed California workers’ compensation laws and regulations that create a matrix for what constitutes wages which can include almost anything you provide to your employees and independent contractors. The first thing we did was read the California Labor Law that led us to five different agencies:

California Tax Center
EDD-Employment Development Department
DIR-Dept of Industrial Relations
DOI-Dept. of Insurance
CSLB-Contractors State License Board

The Department of Labor Standards Enforcement or DLSE provides the background resource validate the Payroll/Remuneration Tables. But the real starting point is to determine just how accurate your workers’ compensation insurance company premium statutory audits are.

Likewise, the WCIRB-WC Insurance Rating Bureau is an important source, too. From all of these departments, the California Labor Code created these taxes:

Admin Revolving User Assessment Fund
Uninsured Employer Benefit Trust Fund
Subsequent Injuries Benefits Trust Fund
Occupational Safety & Health Fund
Labor Enforcement & Compliance Fund
Fraud Account Assessment
Terrorism (9740)

Unlike Washington State, taxes are assessed on a percentage of dollars, not hours. But if you get audited, you can only use HOURS to ensure your regulatory compliance reporting.

Remember, all States query hours and dollars between these taxing authorities to find good audit prospects. Your chances of filing eight different inaccurate reports are pretty good. Unlike Washington that is more selective on what is taxed, California taxes everything: HOURS, OVERTIME, SICK PAY, VACATION PAY, HOLIDAY PAY, AND BONUS—No exceptions!

As complex as the California Workers’ Compensation Uniform Statistical Reporting Plan-1995 effective January 1, 2014 is, it is a mathematical matrix that can be integrated to ensure compliance reporting. We have done all the work. All you need to do is contact us to make your job easier and save time at

PS California has no Reciprocity. So, don’t get caught paying premiums out-of-State.

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