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Staffing Agencies

NJ New Budget Decreases S-Corp Minimum Tax

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On June 30th, 2011, New Jersey Governor Chris Christie signed into law portions of the legislature’s New Jersey budget that included a 25% decrease for the minimum corporate business tax on S-corporations. The new rates are as follows:

Gross Receipts               Minimum Tax

$1 million or more         $1,500

$500,000-$999,999       $1,125

$250,000-$499,999       $750

$100,000-249,999         $562.50

Less than $100,000       $375

The only exception to the decrease will be S-corporations which are members of affiliated or controlled groups with payrolls of $5,000,000 or more. Their minimum tax remains at $2,000.

This last exclusion from the new minimum corporate tax law seems to unfairly discriminate against staffing agencies and service corporations, as their primary expense is payroll. In fact, payroll IS the product being sold. Typically staffing agencies  have controlled groups and reach the $5,000,000 threshold. Yet, solely due to their line of business, they will not benefit from the new reduction.

NJ Eases the Unemployment Tax Increase

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With NJ jobless rate fixed above 9 percent for two years, the unemployment fund has reached a soaring deficit. Such a deficit would normally trigger the highest possible tax rate for employers on July 1st. Fortunately, lawmakers stepped in and passed a bill (through the NJ Assembly) which would increase the tax to $58 per employee, down from $177 for employee if no legislative action were taken. The cost will then climb steadily over the next three years. The bill (S2730) heads to the Senate Budget Committee for approval. Here is a summary of  the proposed Bill S2730 in its entirety;2730_S1.

 

NJSA Legal Symposium re: NJ DOL audits March 2011

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UA Partner, Pamela Avraham, spoke at the NJSA Legal Symposium on March 2, 2011 on NJ DOLS audits of staffing firms. Her presentation addressed how to prevent and handle NJ DOL audits. Her is the summary of the presentation
NJ DOL Audits- How to Prevent Them and How to Handle Them

Items which trigger an audit:
1. Employee complains directly to NJ DOL
a. Compensable time for:
i. Waiting at assignment
ii. Answering emails in evening
iii. Training
b. Not paid for claimed hours worked
c. OT
i. Exempt vs Non-Exempt Status
d. Ease of filing complaint
i. Online
ii. Formularios en espaňol
iii. Trabajadores indocumentados
2. Independent contractor files an unemployment claim
3. Corporate tax return indicates unusual items
a. No wages on line for Wage Deductions- only 1099 compensation
b. Employee benefits not proportionate to wage deduction
c. High amounts in consulting expense
4. From information discovered while auditing the clients of a staffing firm
Ways to Prevent Audit
1. Implement system to resolve compensation discrepancies
a. Weigh the cost benefit of “being right” over having a disgruntled employee
2. Supervisor must report any disputes to manager or accounting manager
3. Explain to 1099 contractors all ramifications of 1099 status
4. Review corporate income tax return with CPA
5. Guidelines found in IRS Circular E and Publication 15-A
6. Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes
7. Consult regularly with employment attorney

Requested Documents for Audit
1. Standard list for wage discrepancy audit
2. Standard list for 1099 vs employee dispute
a. Difference between IRS standards vs NJ standards
What Auditors Discover and Determine during the Audit
1. Review of general ledger
a. Payments for 1099 contractors in employee benefits
b. Payments to independent contractors in numerous accounts
i. Repairs and Maintenance
ii. Consulting
iii. Per Diem
iv. Office Cleaning
v. Computer Services
2. Review of cash disbursements
a. “vacation” payments for 1099 contractors
b. Bonuses for 1099 contractors
c. Payments to contractors with number of hours specified
i. Paying OT for more than 40 hours a week
d. Payments to employee classified as 1099
i. The “split employee”- W-2 for one function, usually a 40 hour week, and 1099 treatment for different function- sales, computer work, security
ii. Best of both worlds for employee
iii. Proper classification
iv. Payments made may be subject to OT for non-exempt employee
3. Review of timesheets
a. Don’t agree to payroll records
b. No payment for OT
c. Total hours per week don’t equal sum of all hours worked in week
d. Hours shown as a total per week, hours worked each day are not indicated
4. Review of payroll register
a. Driver deduction
b. Deduction for improper loans
c. Deduction for damages caused by employee
d. Other illegal deductions
e. No payment for OT
f. Bonus based on production – may be subject to OT

5. Review of 1099 vs employee
a. Schedule C of independent contractor- separate company is preferred
b. WC policy of independent contractor
c. Website of independent contractor
d. Business cards, invoices of contractor
e. Set of books and records of contractor
f. Contract or agreement between company and contractor
g. Advertisements of contractor
h. Calculation of payment- based on hours
i. Number of clients of contractor
Potential Exposure
Payments to employees which are improperly classified as independent contractors may subject the employer to the following :
1. NJ Unemployment, penalties and interest
2. NJ withholding tax
3. US employment taxes
a. Social Security Taxes
b. Medicare Taxes
c. Federal income tax withholdings
d. All of the above per IRS Section 3509
4. OT
5. Medical benefits
6. Pension benefits
7. WC issues
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