To Tony Evangelista, right, knowing the ins and outs of payroll law is not a choice but a requirement for every small businessperson.
Evangelista learned this the hard way when his father lost his masonry business in the wake of a Department of Labor audit, unable to pay the fines, taxes, and additional salary that he owed. The senior Evangelista did not graduate from high school, and, as a result, he did not understand all of his obligations and did not always file the necessary paperwork with the government.
After closing his business, he went to work for someone else, and, added had a large tax burden until the day he died.
Evangelista holds no ill will — the Department of Labor was simply seeking to enforce laws that protect employees.
But some of these laws require very technical distinctions that many small businesspeople simply do not know how to do correctly.
The subject of who owes what to the state and how to pay for it is the biggest news in the state right now. Employers could get a break from a long-expected tax hike, should proposals by Governor Chris Christie get through state legilators. See side bar, next page.
Evangelista, who teaches workshops for Fred Pryor Seminars, is offering a class on payroll law to help companies protect themselves from costly mistakes and legal blunders on Wednesday, March 10, at 9 a.m. at the Holiday Inn.. Cost: $199. For more information, contact firstname.lastname@example.org. To register go to www.pryor.com.
Evangelista reviews common mistakes that can cost small businesses big in a government audit:
Misclassifying independent contractors. To determine who is an independent contractor, says Evangelista, the Internal Revenue Service has set up three requirements:
1). A contractor be independent of the hiring company and not under its control.
2). A contractor must provide an outside service that the hiring company does not perform in its normal course of business. For example, a manufacturing business might contract with a cleaning company.
3). A contractor must be operating as a business, and be available to work for other companies in addition to the hiring company.
Despite the clarity of these rules, misconceptions abound. “Most people think that just because you’re not hired or are paid less than $600, you can automatically be classified as independent contractors,” Evangelista says. But this is decidedly not the case.
Any small business using independent contractors must be careful to distinguish between independent contractors and employees.
Suppose a masonry contractor, like Evangelista’s father, needs a job done that he is unable to complete by himself and asks for help from friends who are also independent contractors. He might assumes that because they work themselves as independent contractors, they can be paid as such. But legally, they should be paid as employees, Evangelista says.
In making what might seem like a small misjudgment, the business owner can run into big trouble from a government auditor, whose goal is to ensure that people are being paid appropriately for their work and that taxes are assessed properly. For every employee, an employer is required pay payroll taxes, worker’s compensation, unemployment, and federal income tax withholding. But for independent contractors, the employer’s only responsibilities are to make sure they are independent contractors and send them a 1099 form.
Following an audit, says Evangelista, many businesses are shut down because they cannot afford to pay three years’ worth of accumulated penalties, fines, interest, and taxes now owed due to misclassifications. And the owners and officers are personally liable.
Miscategorizing exempt and nonexempt employees. When the federal government passed laws mandating minimum wage and overtime, the employer became responsible for paying these to any employee not falling with the three categories that the law exempts:
1). Executive exempt, who must be managing two or more employees, for whom they have control and direction over their work, including doing performance evaluations, handling complaints and grievances, and hiring and firing; they must also be paid at least $455 a week.
2). Administrative exempt, who must perform office or non-manual work over which they have discretion and make independent judgments on the job after evaluating alternatives; they also must be paid at least $455 a week. This category would cover areas like HR, marketing, and accounting.
3). Professional exempt, which covers people with advanced degrees or certifications like doctors, lawyers, and teachers, as well as people who have advanced skill sets not typical in the workplace, like musicians, artists, and dance choreographers.
Suppose that a company is employing an engineer to do machining work. Whereas the company might assume the person is professional exempt, in fact the person is nonexempt because he or she is not using advanced engineering skills — he is working as a technician. Because this engineer is nonexempt, the company is liable for minimum wage and overtime.
If the company had misclassified the engineer as exempt and the Department of Labor found the engineer was classified incorrectly, the company would be liable for back overtime pay and would also have to pay the taxes on the overtime.
Holding back final paycheck. Sometimes employers will hold or dock a final paycheck until the employee returns uniforms or equipment, but in most cases this is not legal.
Some states, however, have exemptions in certain cases, for example, if equipment is damaged.
Taxing perquisites and fringe benefits. Many gifts and fringe benefits provided by companies are taxable. The employer must withhold Social Security and Medicare payments and the employee must pay taxes on the value of the gift. These include cash and equivalents like gift cards, bonuses, awards, and raffle winnings.
Also in this category is personal use of company cell phones, but because the Internal Revenue Service has not yet figured out how to calculate this, it will not be enforced this year.
Other areas of payroll law involve knowing who is legal to work in the United States and who is not, how much taxes should be withheld, and how to maintain necessary payroll records.
Evangelista grew up near Syracuse, New York, where his grandfather had a dairy farm. His mother and stepfather worked for Phillips Magnavox.
Evangelista remembers working many hours at grocery stores during high school. Although he was valedictorian of he was trained at the Lackland Air Force Base in Texas as a dog handler in the security police.
After serving as a “canine cop” in Germany, he was selected to go to the Air Force Academy in Colorado Springs. He majored in African history, from a more analytical perspective than is usual at most colleges, but he also took 110 hours of core engineering and science classes. “More than most engineering majors,” he says.
After the academy he was a liaison officer for the Marines’ chemical biological instant response force, mostly at Camp Lejeune.
When he came off of active duty, he moved to Shreveport where his wife, a B52 navigator for the Air Force, was stationed, and he earned an MBA at Louisiana State, focusing on human resources.
His first civilian job was with Home Depot, where he spent a year as a store manager in Virginia. He then started consulting with overseas manufacturers, whom he helped sell to Home Depot. In the course of this work, he came up with an idea for streamlining international trade and got funding to pursue it, but the funding was yanked after the downturn.
After spending another year trying to raise money, he started instructing for Pryor a year ago as an independent consultant.
Through Pryor, Evangelista gets to help out the small businesses where he can make a real difference. “I can sit in a room with MBAs, but they know where they are going,” he says. But small businesspeople, he says, “need somebody to turn over the rocks for them because they don’t know what rocks to turn over.”
— Michele Alperin
New in Town
Colliers International, 100 Overlook Center, Second Floor, Princeton 08540; 609-375-2057. Kevin Coleman, sales director.
After years as the largest member of the Colliers International family of commercial real estate firms, FirstService Williams has been fully acquired by Colliers and has opened an office in Princeton.
Attracted by the region’s life sciences, financial services, and university sectors, Colliers International (which is related to but separate from Colliers Houston, a commercial real estate firm with an office at 116 Village Boulevard), comes to Princeton to tap into a relatively healthy office market. Though vacancies average above 20 percent, the area office market is doing better than most commercial hubs in the state and has not suffered from overavailability.
In fact, signs of the office market bouncing back include a pair of leases that should put the first tenants into the long-dormant University Square office building on Alexander Road at Route 1. Last summer Japan-based Otsuka Pharmaceuticals signed a 67,531-square-foot lease for the entire top floor of the building to serve as its U.S. headquarters.
The company is expected to move its American headquarters from near Baltimore and its office at Overlook Drive in late spring. Meanwhile, Axis Insurance Company, which signed a 26,600-square-foot office lease on the second floor at the end of last year, is expected to move its offices from Maryland to University Square around the same time.
Kevin Coleman, who served two tears as a vice president at Commercial Property Network on Emmons Drive, will be Colliers’ sales director at Overlook Center. He will focus on tenant and landlord representation in the region.