Managing Your Payroll
Updated: Jul 15
By Rayan Omer
Probably, there is no small business left untouched by Covid-19’s adverse effects. Owners of small businesses are overcoming new challenges every day during this unprecedented time. Besides the challenge of keeping their business running, employers need to figure out how to manage their payroll and taxes to the new normal of the Coronavirus pandemic.
The new reality is that employees are working from home due to the shelter-at-home order amongst all other uncertainties. It’s essential to know how to track the hours of your employees working from home or even to calculate their over-time.
It's time-consuming and challenging to manage employee’s payroll and taxes. Small businesses spend an average of $2,000 per employee on managing payroll, according to PricewaterhouseCoopers. It’s vital to keep track of payroll and tax filing of your employees to avoid any penalties. According to the IRS, 40% of small businesses incur, on average, $845 in penalties each year. These penalties can have a significant impact on your company’s success, especially if you are a small business because money is always tight.
Defining Your Employees
Before you start managing your employee’s payroll, it’s critical to know what type of employees your business has. For example, are they full-time employees, part time, independent contractors, exempt employees or nonexempt?
Exempt vs. Nonexempt employees
What do exempt employees mean? The term might be confusing, but it means whether your employees are exempt from overtime pay, as opposed to nonexempt employees. The latter qualifies for payment of any overtime hours worked.
Exempt employees are paid a salary, not on an hourly wage. The benefits of exempt employees are they are not entitled to overtime pay, as mentioned above. Bear in mind that federal law limits the type of employees who are considered exempt. For instance, exempt employees are like executives, managers, and professionals like lawyers, doctors, and any job that provides independent decision-making.
On January 1st, 2020, federal law requires salaried employees to be paid a minimum of $684 per week ($35,568 annually).
Paying nonexempt employees is different because they get paid based on the of hours worked. When the employer pays his employees, he must at least meet the minimum hourly pay wage required by the state law they live in. In the event the employee works more than 40 hours a week, the employer must pay his hourly wage plus overtime work.
Part-time vs. Full-time Employees
The Fair Labor Standard Act “FLSA” provided an upper limit on the hours a full-time employee may work per week. Employees may not work more than 40 hours per week. Defining what it means to be a full-time or part time employee would depend on your interpretation as long as they don’t exceed the upper limit set by the “FLSA.”
So, if your company decides a full time employee is one who works 35 hours per week, then a part time employee is simply anything less than 35 hours per week. Thus, there are no specific hours that legally define part-time hours.
Independent Contractor vs. Employees
It’s crucial to know whether your employees are independent contractors or employees, as this would affect your liability into withholding taxes, Social Security, and Medicare from their paid wages according to the CPA Journal.
Additionally, the consequences for misclassifying an employee as an independent contractor without reasonable justification could make employers liable for their employment taxes. If a small business owner has a reasonable basis for considering a worker as an independent contractor rather than an employee, then they can avoid the liability of paying their employment taxes associated with an employee classification according to the IRS.
There are some guidelines the IRS provided to help in determining whether a worker is an employee or an independent contractor. These guidelines fall into three main categories: behavioral control, financial control, and relationship control.
The behavior control factor focuses on the company’s right to control the employee’s work. This includes what the worker does, how he does the job, and how it supervised the employee.
The financial control test determines whether the employer can limit the employees from taking other jobs while working for the company, whether he is provided with the tools to work or the employee brought their own tools with them.
Last factor that guides in knowing whether the employee is an independent contractor or an employee is how the parties view each other’s relationship. For example, is the employee under the impression he is eligible for health insurance, paid vacation and other perks that are only given to employees?
Employers should weigh all of the three factors when determining whether a worker is an employee or an independent contractor. That’s why it is crucial to look at the entire relationship, evaluate the degree and extent of the right to control.
Tracking Your Employee’s Hours
Employers need to comply with federal, state and local laws regarding paid leave, breaks and overtime. According to Chron, tracking your employees hours is vital to ensuring they are fairly compensated and complying with the Department Of Labor.
Before discussing the best way to record employee’s hours, we need to clarify what does work hours mean precisely. The Department Of Labor “DOL” defines work hours as “the time an employee must be on duty, on the employer premises, or at any other prescribed place of work.” In other words, work time for which an employer must pay his employee includes all the time the employee was on duty or at the workplace.
The court has excluded the time spent on the job while employees wash or change their clothes before or after work, according to Thomson Reuters, unless these activities were a part of their specialized work. For example, employees working in construction might be required to wear protective gear before performing their job. Additionally, work hours do not include time spent on commuting or pre-work time to get ready.
Recently, some courts have included pre-work and commute to work hours which requires payment as well. To consider those activities in the work-hours, they must be "integral and indispensable" to their principal activities.
There are three known ways to track your employee’s hours: 1) sign-in sheet, 2) a clock that prints the time on a paper, and 3) a computer-based tracking system. It is important to note that an employee’s time card, regardless of which format the employer used, is a legal document that can be used as evidence in any legal proceeding. Also, the IRS can request or reference the record time to ensure compliance with the laws. The “DOL” is flexible about the method of timekeeping the employer chooses to track employee’s hours. An employer can select any plan that works for his business.
Determining when a workday begins or ends is governed by the “Portal-to-Portal act. This act is an amendment to the “FLSA” that requires an employer to pay for his employees for any time spent that benefits the employer or is controlled by him. For example, if an employee is engaged in an activity not directly related to their job but undertaken to serve the employer, these activities would be considered work time.
Chron provides some instances of these activities that are considered part of the work hours. An example would be that an employee who travels as part of the workday.
Additionally, if an employee is required to be at work waiting for customers like a cashier, he is entitled to payment for his waiting, regardless if he had customers or not. Lastly, on-call workers who are scheduled for possible work may be considered working if they are obligated to be present at the company.
The “FLSA” has set a record-keeping requirement for employers to track nonexempt employees. These requirements include having the necessary information about the employee, such as the employee's name, address, date of birth, employee pay rate, and time and day of which the employee begins work, any deductions made, and overtime pay.
It's essential to record the payroll files for at least three years and at least two years for the wage computation record.
How to Track Employee’s Hours From Home?
Using software to track employee’s hours is the easiest way to deal with tracking, since an employee can’t sign in a sheet, nor log in at the work clock. The ultimate solution is using computer software. A small business owner can use a software solution system to monitor his employees’ log-in and log-out information from work. The employer should remind his employees that they should log out of the system when they are on a break. Additionally, the company may require the employees to sign an acknowledgement to only work when they are clocked in.
Overtime Pay for Nonexempt Employees
An employer is required to pay his employees for any hours worked in more than 40 hours per week, regardless of where that work was done, at home or in the office. For overtime wages, you are required to pay the employee hourly wage multiplied by 1.5 for every hour of overtime work they conducted. For example, if your employee earns $20 per hour, his overtime hour is $30.
Separating your professional and personal life might be harder when working from home. As for so many workers, their homes become their new office. That’s why calculating the employees overtime is going to be tricky.
Employers should communicate clearly with their employees that an employee may not work any overtime without prior approval. By doing this, you are telling your employees not to work any overtime without your knowledge. An employee might still work overtime nevertheless and thus becomes entitled to payment despite your instructions. In such a case, the company may have the right to terminate his employment, according to Paycor.
According to FLSA Home Page, employers who fail to pay for their employees under the law would be at risk of overtime claims. Potential claims can arise from employers mistakenly treating employees as exempt from overtime pay or when they fail to compensate for overtime hours to their employees.
Additionally, overtime claims can arise if employers fail to include “wage augments,” which provide shift differentials, longevity pay, attendance pay, and "bonuses" of various kinds are at risk of overtime claims.
In summary, employers should have reasonable justification in defining the statuses of their employees, including whether they are exempt or nonexempt from overtime pay, or if they are employees or independent contractors. Additionally, small business owners should have a mechanism for tracking employee working hours. An employer can use software to follow those working from home and to compensate the employees for any overtime work. To avoid overtime claims from employees working from home, it’s essential to have them sign an agreement that no overtime is allowed without prior approval.
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