Red Flags
These are payroll "red flags." These
kinds of things are signals to various regulatory agencies that you're
probably doing something wrong. Some of these should be used as
"internal" red flags as well. They may not get spotted by an
auditor, but YOU should spot them.
W-2's and 1099's
Avoid issuing both of these information returns in the
same year for the same person. Doing so signals that you are
treating an employee as a contractor at the same time (which is probably
wrong). It might also occur because you are giving them a fringe
benefit for which you think a 1099 is appropriate (it's not).
1099's to Social Security Numbers and individual names.
This situation indicates the same kinds of problems as
above. If you really have a contractor, why don't they have a DBA
and a FEIN?
AP Checks to Individuals
For the same reason as above, why are you issuing checks
to individuals. If they really have a business, why don't they have
a DBA? They might legitimately be contractors, but they will attract
the attention of an auditor.
Company Cars
The IRS knows you've got these, and they're easy to
find. If you get audited, expect to be asked about this.
Reimbursed Business Expenses
They know you have these too. And they always look
at them, particularly for highly compensated and control employees.
Other Fringes
These fringe benefits are obvious, easy to find, and
generally significant: moving expenses, travel, training, tuition
reimbursements, loans and sign-on bonuses. And beware of the
accounting trick of trying to bury these expenditures in other
accounts. When the IRS finds them, you're going to have to explain
WHY you misclassified them.
Bonuses for Non-Exempt Employees
If you're giving them commissions, production bonuses,
etc., you are hopefully doing the regular rate of pay calculation
correctly. If not, this will get found during a Wage-Hour audit.
Too Many Exempt Employees
The rule of thumb is that no more than 1/3 of your
employees should be exempt from overtime. This will fluctuate, of
course, based on your business. A professional services organization
will have a much higher number of exempt employees, while a manufacturer
or a construction company will have a much lower number. But if your
number is higher than 1/3, you should at least investigate.
Don't Get in the Newspaper
Auditors watch the newspaper. Avoid coverage of your
problems, which might catch the attention of those who can make even more
trouble for you.
Contractor Gets in Trouble with the IRS
If they can't pay their taxes, they may attempt to shift
the blame back to you for not having withheld taxes like "you should
have." Be prepared to defend your decision to make them a
contractor.
Contractor Files for Unemployment
The unemployment commission is going to contact you asking
just precisely why you didn't pay unemployment taxes. Like before,
be prepared to defend your decision to make them a contractor.
SS-8 Form from Contractor
If they want to be a contractor, this is one way for them
to trigger interest from the IRS.
Poor Record Keeping
If you can't explain problems or have trouble digging up
requested files, the auditor is not going to give much credence to your
records. This is trouble and will likely result in a more careful,
and lengthy, review with more follow-up visits. W-2 and
941 Balancing
Duh? This ties in with the above item. If your
records don't balance, don't expect the auditor to just assume everything
is OK. Audit by One Agency
Agencies will talk to each other if they find something
during an audit. So if you get one audit, you are much more likely
of getting audited by another agency. If you can think
of more, please let us know. |
