Common Paymaster: What you need to know

After the close of every quarter, businesses are reminded of the many existing tax code intricacies. One lesser known layer not to be taken lightly is the common paymaster rule. This rule can have a major effect on employers with distributed workforces where employees work in multiple locations.

common paymaster

What is a Common Paymaster?

The IRS describes the common paymaster provision as a special rule for paying taxes.  When an employee simultaneously works for several related entities during a given year, the parent entity as a whole will end up overpaying certain payroll taxes. A common paymaster is a designated entity that pays wages to that employee on behalf of the related entities, thus only being charged for that employee’s share of payroll taxes once.

Let’s look at an example:

restaurant serverTom works at a restaurant, Dining Inc. He works at Location A on the weekdays and Location B on the weekends. Dining Inc. will be charged for Federal Unemployment Tax (FUTA) on all of Tom’s wages from each location separately, even if together his wages exceed the $7000 wage base.

This is where a common paymaster comes into play. Under certain conditions, the IRS grants Dining Inc. the right to designate Location A or B as a common paymaster. If Location A is deemed the common paymaster, it can issue Tom a consolidated paycheck that reflects his hours worked at both locations. Instead of the employer being subject to two wage bases for FUTA (and state unemployment tax (SUTA) in states where common pay is allowed) with respect to Tom, the employer is only subject to one.

The IRS also allows the use of a common paymaster for Social Security tax purposes. State laws vary on recognizing a common paymaster for SUTA reporting. StratEx clients can check with their Service Team, and anyone can check with applicable state agencies to see if common paymaster is a feasible option in your state of operation.

Overtime

Common paymaster provisions can also come into play when calculating overtime. First, a company and its related entities must meet the IRS’s criteria for common paymaster AND the Department of Labor’s requirements for joint employment. Then, the designated common paymaster can be used to calculate overtime for employees who work across the related corporations. Since it is a single entity, the common paymaster makes it much easier to calculate overtime for the employees paid under it rather than manually calculating overtime across the different entities.

Is common paymaster in play for your business?

The exact verbiage of the rule states that “If two or more related corporations employ the same individual at the same time and pay this individual through a common paymaster that is one of the corporations, the corporations are considered to be a single employer.”

Corporations are considered “related” for instances such as when fifty percent of one corporation’s officers are also officers of the other corporation, or when thirty percent of employees simultaneously work between the two corporations. The common paymaster is also responsible for keeping payroll records and remitting payroll taxes for the employees it pays as a common paymaster.

For more information, you can see how the IRS lays out exact provisions for common paymasters in Publication 15-A and Regulations section 31.3121(s)-1.

New Overtime Regulations: What you need to know

Gretchen-Van-VlymenStratEx’s Gretchen Van Vlymen recently contributed to a SHRM article written by Dana Wilke, The Nuts and Bolts of Complying with the New Overtime Regulations. Click here for the full article, but here are a few highlights:

  • The annual salary threshold for employees exempt from overtime pay will increase from $23,660 to $47,476 on December 1st.
  • Gretchen reports it is taking our HR Account Managers at StratEx from eight to 24 hours with each client to navigate through the new regulations and implement the changes necessary to be compliant with the rule. The DOL estimated it would take one hour per company.
  • Hospitality and restaurant companies can be particularly tricky to figure out, with variable or unpredictable hours, split roles and other considerations.
  • Paycheck deductions tied to benefits may need to be reviewed and updated if benefit offerings are affected based on employee exemption statuses.

If you have questions about the new overtime regulations and how they may affect your employees’ exemption statuses, StratEx can help you navigate this, and other tricky HR and Payroll related topics. Contact us now for more information.

The Ripple Effect of Minimum Wage Ordinances

img_3876-1On Thursday, April 14th, groups of labor protesters walked the city streets of Chicago. Their demand: raise the minimum wage to $15 per hour. Protests like these continue to impact the trends of City and State minimum wage increases across the country.

So, how do the growing demands of groups like these impact small businesses, customers and job seekers alike?

Let’s take a look.

First, here is a quick breakdown of three recently passed minimum wage ordinances: the City of Chicago, the State of California, and three different ordinances throughout the State of New York.

Chicago:
Effective Date

Non-Tipped Employees

Tipped Employees
Current $10.00 $5.45
1-Jul-16 $10.50 $5.95
1-Jul-17 $11.00 Increases with CPI
1-Jul-18 $12.00 Increases with CPI
1-Jul-19 $13.00 Increases with CPI
1-Jul-20 Increases with Consumer Price Index (CPI) Increases with CPI
California:
Effective Date

26 or More Employees
25 or Fewer Employees
1-Jan-17 $10.50 $10.00 (current rate)
1-Jan-18 $11.00 $10.50
1-Jan-19 $12.00 $11.00
1-Jan-20 $13.00 $12.00
1-Jan-21 $14.00 $13.00
1-Jan-22 $15.00 $14.00
1-Jan-23 $15.00 $15.00
New York City: Effective Date
11 or More Employees

10 or Fewer
31-Dec-16 $11.00 $10.50
31-Dec-17 $13.00 $12.00
31-Dec-18 $15.00 $13.50
NY Employers in Nassau, Suffolk and Westchester Counties: Effective Date
31-Dec-16 $10.00
31-Dec-17 $11.00
31-Dec-18 $12.00
31-Dec-19 $13.00
31-Dec-20 $14.00
31-Dec-21 $15.00
NY Employers in remaining part of State:
Effective Date
31-Dec-16 $9.70
31-Dec-17 $10.40
31-Dec-18 $11.10
31-Dec-19 $11.80
31-Dec-20 $12.50
1-Jan-21 Rate will increase to $15.00 on an indexed schedule to be set by the Director of the Division of Budget (DOB) in consultation with the Department of Labor.

 

It is probably too early to say who will be impacted the most by such legislation. A growing concern for small-businesses located outside of the City of Chicago may be whether they can afford to compensate employees to compete with the Chicago market, especially as the minimum wage continues to increase. On the opposite end of the spectrum, small businesses, within the city limits of Chicago, may find themselves asking whether they can afford to continue operations in the city. This in turn, may drive businesses to consider relocating jobs.

ChicagoProtests2

Last summer, one of my clients provided feedback they had received from reputable employment agencies, Pro Staff and AIG: there was a shortage of available seasonal workers. They attributed this shortage to employees that were not as willing to work for wages below Chicago’s $10 per hour minimum wage.

That leaves us with the question:

“Will people be willing to work for a lower minimum wage in surrounding areas, whether that be Chicago’s suburbs, or in the surrounding states of California and New York, knowing that they may be able to find employment nearby for a higher wage?”

If suburban companies continue to see a decline in available workers, how will those companies respond …Increase their labor costs? Offer employees other forms of compensation? Raise price of goods?

HiringI would be remiss not to mention the arguments behind these recent minimum wage increases. One primary argument is that this addresses the cost-of-living increases; Chicago city officials estimate that more than 400,000 Chicago workers will benefit for this reason alone. In addition, proponents for raising the federal minimum wage argue it would increase economic activity, reduce poverty as well as government welfare spending, and spur job growth.

Economists from the Federal Reserve Bank of Chicago predicted that a $1.75 rise in the federal minimum wage would increase aggregate household spending by $48 billion the following year, thus boosting GDP and leading to job growth; however, such labor increases may end up of having the opposite effect on workers and job seekers, as job-creation may begin to halt.

In certain industries, they already have.

According to an article posted on Investor’s Business Daily, recent Labor Department data shows that job creation is actually on the decline, at its slowest pace in at least five years, specifically in the leisure and hospitality sector. Chicago had their slowest year of job growth in the leisure and hospitality sector since 2009. Employment gains from October through December of 2015 averaged less than half the pace seen in 2014 at just 1.1 percent. In addition, increasing labor costs may drive businesses to increase their prices, if they wish to continue to seek profits, which in turn may negatively impact the consumer. Specifically in the fast-food industry, the Federal Reserve Bank of Chicago stated that if minimum wage is increased, fast-food restaurants would pass almost 100% of their increased labor costs on to consumers.

There’s no doubt that the increase of minimum wage will create a ripple effect felt by customers, job seekers, and employers.

Employers, particularly small-businesses located in areas near Chicago, California and New York, should begin analyzing whether to compensate their employees to match the local minimum wage hikes, especially if the trend of “employees not-as-willing to work for a lower wage” heightens and leads employees to migrate to companies and or locations that will.

Monthly Wage Reporting: Here to Stay

Ask anyone who processes payroll… if there’s one task they don’t need, it’s filing another report. Make it a time-sensitive, penalty-threatened report, and the topic becomes grim quickly.

Here’s an example hitting some of our clients: In June of 2012, Illinois governor, Pat Quinn, signed the Save Medicaid Access and Resources Together Act, more commonly known as the SMART Act. The Act included a mandate for Illinois employers to file a report with their employee wages on a monthly basis. It went into effect in January of 2013 for employers with 250 or more employees, and that threshold has been systematically reduced to employers with 25 or more employees over the last year and a half. Critics say (quite rightly, in our opinion) that the required monthly wage reporting has presented employers with yet another burden of risk and increased administration costs.

The monthly wage reporting has been a hot button issue since it was enacted. Prior to the Illinois monthly reporting mandate, most payroll departments were only equipped with software to report wages on a quarterly basis. Employers and payroll service providers were given a short six months to develop software that would fit the specifications to meet the electronic filing requirement. Meanwhile, the Illinois Department of Employment Security has been quick to assess penalties for companies that have not been in compliance. The penalty for filing late ranges from $5 to $10 per $10,000 in wages filed.
Unfortunately, monthly wage reporting does not appear to be going away. In fact, it may be slowly catching on with other state employment agencies. In May of 2014, New Jersey introduced a bill that, if passed, would require employers with 50 or more employees to report employee wages to the agency within 20 days after the end of each month. This mandate would include “every form of remuneration.” The American Payroll Association notes that this would be an even bigger burden than the Illinois mandate because both the due date is ten days earlier and the types of payments/benefits that would qualify as remuneration in New Jersey can be difficult for a payroll department to calculate on a monthly basis.

The costs associated with developing and administrating these monthly wage reports along with the potential penalties have made this mandate a gloomy topic in the payroll world. Small businesses that process payroll in house feel the increased costs and frustration with these ever-changing mandates most acutely. No good news here… sorry to say that the reporting mandates don’t appear to be going anywhere.

Minimum Wage Updates for 2015

If your company pays minimum wage to any employees, one payroll year-end task is surely on your checklist: updating minimum wage rates.

To help in your endeavor, here’s a quick overview of states that have minimum wage changes beginning this Thursday (or Wednesday, in NY’s case):

Alabama– $7.25 Montana– $8.05
Arizona– $8.05 Nebraska– $8.00
Arkansas– $7.50 New Jersey– $8.38
California (San Diego only)– $9.75 *New York– $8.75
Colorado– $8.23 Ohio– $8.10
Connecticut– $9.15 Oregon– $9.25
Florida– $8.05 Rhode Island– $9.00
Hawaii– $7.75 South Dakota– $8.50
Massachusetts– $9.00 Vermont– $9.15
Maryland– $8.00 Washington– $9.47
Missouri– $7.65 West Virginia– $8.00

*effective December 31, 2014