Don't Do THIS with Employee Wages

August 14, 2011

Even before the IRS started developing algorithms to help catch employers who play fast and loose with withholding taxes and with employees classified as “independent contractors,” my very first business accountant gave me this piece of advice:

(1)  Paying off the books:  “Don’t let your employees’ tax issues with Uncle Sam become your issues.”

He went on to advise against paying people “off the books,” for a number of reasons:

• when you eventually have to pay them on the books, they’ll be taking home less money each week, and will want you to raise their pay to make up for that.  And now, there’s a morale problem --- either your employee’s, or yours.

•  if you fire someone you’ve been paying off the books, and they somehow get the idea they can apply for unemployment – you’ll start getting some tough questions regarding how much they were paid.  Government agencies are talking to each other more frequently than in the past (Labor Dept; IRS).

 (2)  Independent Contractors:  Employers who pay people as  “independent contractors” rather than as employees are taking an increasingly large risk:

• Both the IRS and the Labor Department have long lists of criteria that someone must meet to be considered a true independent contractor (IRS: http://www.irs.gov/pub/irs-pdf/p15a.pdf).

•  The IRS is now devoting more resources (and computer power) to sniff out employers who are misusing the independent contractor classification.  Penalties can be stiff, because these employers are not withholding taxes from independent contractors – taxes which must be forwarded to the state and federal government on a regular basis.

•  If a faux independent contractor is injured on the job, guess who’s liable:  the employer.  And if that employer hasn’t been including the person’s wages in their worker’s compensation insurance premiums, that accident might be a non-insured event.  Meaning the employer could be held liable for medical costs, at the very least.  [By the way, make sure that real independent contractors and subcontractors who perform work for you carry their own worker’s compensation insurance].

 (3) Forcing employees to work “off the clock” (uncompensated); and not paying overtime when required:

            Even a "big box" chain store got into trouble for the first of these.  Is your legal department and “war chest” as big as theirs?  These practices are an invitation for a complaint to the Department of Labor or the EEOC – especially when you’ve terminated someone who is now angry both about being cheated and about losing their job.  All it takes is one complaint, and your company gets investigated and audited.

So: don't take shortcuts like these that can backfire and cost you a lot more than you even hoped you could save.

-- Steve Caccavo, Founder of Constructive Business Solutions™, draws on his years of entrepreneurial experience to provide “been there, done that” business advice to owners of small and mid-size companies.   © 2011 by Constructive Business Solutions™, a division of Positive Employment Practices, Inc.