The COVID-19 pandemic has thrown the economy for a loop. Many law firms have had to trim expenses and furlough employees. Laying off or decreasing pay for support staff, associates and partners can add payroll tasks to your workload. If your firm is reducing people on the payroll or outsourcing work to independent contractors, there are several issues management should review carefully.
Stay current with recordkeeping
The U.S. Department of Labor (DOL) requires every employer covered by the Fair Labor Standards Act (FLSA) to keep records for each nonexempt worker (state requirements may vary). The law does not specify the form of records, but they must include certain identifying information about the employee and data about the hours worked and wages earned. Unsurprisingly, the law requires this information to be accurate.
Generally, firms should retain payroll records for at least three years and wage computation records for two years. The latter includes timecards, wage rate tables, work and time schedules, and records of additions to or deductions from wages. You may keep the records in your firm’s office or a central records office.
Avoid employee misclassification
Employee misclassification is always a hot topic. In 2018, the DOL updated guidance on the appropriate standard for determining whether an employee is misclassified as an independent contractor under the federal FLSA. In 2019, it issued an opinion letter covering the classification of independent contractors in today’s gig economy. In recent years, the DOL has entered into agreements with many state agencies to cooperate in pursuing enforcement against misclassification of employees as contractors.
But contractor misclassification is not the only type of misclassification on the enforcement radar. The FLSA also exempts certain employees from overtime pay. New rules went into effect on January 1, 2020, increasing the earnings threshold required to exempt many executive, administrative and professional employees from the FLSA minimum wage and overtime requirements. Firms can claim an exemption from overtime regulations for employees who are “bona fide executive, administrative, professional and outside sales employees,” if the employees meet certain conditions. Employers must be aware of state tests which may be more stringent.
Manage payroll taxes
Every employer must withhold Social Security, Medicare and income taxes from its employees’ pay. Withheld Social Security and Medicare taxes, along with the employer’s Social Security tax contribution, generally are known as payroll (or FICA, for Federal Insurance Contributions Act) taxes.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act enables employers to delay payment of their share (6.2% of wages up to a wage base limit of $137,700) of the Social Security payroll tax. They can pay the tax over the next two years, with the first half due by December 31, 2021, and the second half by December 31, 2022.
Related Read: What Does the Executive Action Deferring Payroll Taxes Mean for Employers and Employees?
The Medicare tax rate is 1.45% each, with no wage base limit. Your firm must withhold an additional 0.9% Medicare tax from employees whose wages are in excess of $200,000 per calendar year. Only employees are subject to the additional Medicare tax, not employers. However, the Federal Unemployment Tax Act (FUTA) is your firm’s responsibility. Employers must pay 6% of an employee’s wages — up to the wage base limit of $7,000 — with a maximum credit of 5.4% for payments to state unemployment funds.
Failure to deposit any withheld taxes with the government on a timely basis can cause the IRS to hold your firm and other “responsible persons” personally liable for all outstanding amounts plus penalties and accrued interest. You must report FICA wages and withheld FICA and income taxes quarterly (using Form 941) and FUTA wages and taxes annually (using Form 940). State withholding and reporting obligations vary.
While laws affecting payroll taxes and other employee compensation issues can change annually, the COVID-19 pandemic has resulted in even more legislation affecting payroll. Staying on top of the latest changes is more important than ever. Be sure to stay in touch with your ORBA financial advisor to ensure you are not missing anything.
For more information, contact Rob Swenson at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Law Firm Group.