I know its been a while since my last post, but the month of March has given those of us in the employment and  business services realm a great deal to think and be concerned about.

At a March 12, 2010 an address to the American Payroll Association's 2010 Capital Summit in Washington DC, John Tuzynski, head of the Employment Tax Operations, Small Business/Self Employed Division of the IRS indicated that "For the first time in IRS history," the agency will begin to make assessments of an employer's share of employmenet taxes (Social Security, Medicare and Federal Unemployment Tax) for unreported tip income exceeding $20 and reported on IRS Form 4137 (Social Security and Medicare Tax on unreported Tip Income, usually attached to Form 1040).  This signaled the IRS' intent to comb their databases of filers of form 4137 and cross-reference those numbers with those reported by the employer to see if the employer had filed their share of the of the Social Security, Medicare and Federal Unemployment Tax on that unreported tip income.  This was not an IRS practice until 2010, which should result in significant demands for payment by the employer by the IRS, although they indicated they would not assess penalties and interest to cooperating employers.  This is building storm of liability for the hospitality industry and since it will represent unpaid income from many year's past, and will be a significant problem for these employers who did not pay tax on that income.

Interestingly enough, I ask if the tip income was unreported in the first place, how is the employer to know about it?  Go figure.

Next, on March 18, 2010, the signing of the HIRE Act of 2010 into Law by President Obama took small business into Alice's "rabbit hole", announcing incentives intended to reinvigorate hiring by then forgiving some of the above mentioned employer taxes.  Nothing like a good old fashioned rewrite of the employment tax code regarding employer responsibilities to boost the economy.  The good news is that the HIRE Act of 2010 basically lowers the cost of bringing on new employees by 6.2% by forgiving the employer-side social security for each eligible new employee hired.  And also provides a nice end-of-year tax credit for retaining those employees for 52 weeks.

Eligible new hires mean an individual who was unemployed for no less than 60 days leading up to their time of employment with the forgiveness-seeking employer.  Considering that in a well-managed organization new employees mean either an increase in efficiency (so a resulting decrease in cost) or an increase in sales (creating an increase to the top and hopefully bottom lines), this should represent good things for companies emerging out of the darkness of the "Great Recession".

Then by Monday, March 22, we learn that the health care bill has been passed.  Since detail on that and its impact on businesses is a blog post in and of itself, I will save that for another time.

Finally, on 3/25/2010 the Massachusetts Department of Revenue announces a two-monmth tax amnesty program between April 1, 2010 and ending June 30, 2010 for taxpayers with existing business tax liabilities, including unpaid sales/use tax, meals tax, tax on telecommunications services, meals tax local option, witholding income and other taxes.  For all taxpayers who make full payment of taxes due will be granted amnesty for unpaid penalties for tax years or periods that ended on or before December 31, 2009.

The landscape is changing.  I am just not sure into what.

So it seems my last post (timely as it was), which mused about the proposed HIRING Act of 2010 was trumped by an announcement that President Obama had decided to jump on the bandwagon with his own proposal.  In his proposal, The Small Business Jobs and Wages Tax Cut, outlined on Jan 29, 2010 is intented to kickstart new hiring by small businesses.  Under Obama's plan, small businesses would receive a $5,000 tax credit for every new employer hired in 2010.  This would be capped at $500,000 per business and $250,000 for start-ups.  The credit would take the form of reimbursement for the increase in Social Security Taxes paid on real increases in their payrolls, creating what was referred to by the White House as a "de facto payroll tax holiday".  Like the HIRING proposal I mentioned in my last post, this credit would be claimed on a quarterly basis but unlike the other proposal, explicitly states the method of renumeration.

President Obama claims that this proposal will be worked into the various other proposals that have already advancwed in Congress, such as the HIRING Act of 2010 and the Jobs for Main Street Bill of 2010 (which was approved by the House on December 16 and would be paid from TARP funds as part of the Emergency Economic Stabilization Act of 2008.  The Small Business Jobs and Wages Tax Cut carries the blessing of Morgan Stanley, the Economic Policy Institute, the Small Business Majority, and a number of leading economists.

What do these mean for us?  First, the President's proposal is specific in that the credit is for "Net Jobs Created".  In other words, if you lay off 10 people and hire 5 in 2010, you are not eligible for the credit.  Your business would be eligible for credit an increase in "Net Gross Pay" as well, providing the proper incentive for you to do so by eliminating the proposed increase in your employer share (6.2% of the Employee's Gross Wages up to $106,800) of the Social Security Taxes.  This proposal seems sound in the sense that the employer cost to bring on a new employee is lowered significantly and if you assume that the employee is hired with the intention of either delivering new revenue, or new growth to the business, then that means that the cost of doing so hs just come down signifcantly for  2010.  As well, if your company has increased revenues in 2009-2010 and you now require new employees to fulfill the obligations created to your clients by that growth, then your cost of labor has decreased significantly, at least for 2010.

But is it sustainable?  What happens if I as a business owner get used to the lower cost of labor, and as a result, must meet the reality of "newly" realized employer taxes in 2011?  Not if we are betting the jobs growth will create economic growth and the resulting increase in employment opportunties.  But if that economic growth does not happen, won't we be back in the mode of trimming headcount again?  Which leads me to my second concern about this plan:  while the cost to employ is decreased in 2010, the risk of hiring does not in the sense that employers still must bear the pain of supporting their State's unemployment burden, which can increase for a business if the new hire "doesn't work out".  In other words, most State Unemployment Agencies are under pressure to grant benefits to the unemployed even if the reason for unemployment was justified.  This means that the burden again, goes to the employer who is funding the unemployment benefit. 

So could this plan be the beginning of the end for the employer Social Security Tax, and potentially a reprieve in unemployment benefits...?  Don't count on it.  And as I have said before, there is still healthcare to deal with.  But all, in all, the idea (and the fact that we are talking about it), is a good start.

On January 13, 2010 a new bill was introduced to Congress, HR 4437, under the name Hiring Incentives to Reinvest and Incentivize New Growth Act of 2010, or HIRING Act of 2010.  Intended as an addition to the same section of the IRS Code that provides credits to first-time homebuyers, its intent is to grant a 15% tax credit to any employer who expands their payroll by 3% in any calendar quarter of 2010 and a 10% tax credit to any employer who expands their payroll by 5% in any calendar quarter of 2011.  The credit would be paid quarterly so benefits would accrue to businesses more quickly.  The intent, of course, is to get businesses to hire more employees, restore or increase employee pay and increase employee hours.

According to the wording of the bill (see link in preceding paragraph), if my company's total gross payroll in Q1 2009 was $100,000 (for easy number's sake) and my total gross payroll in Q1 2010 was $110,000, then I would be eligible for a credit of $300.00 under the following formula:

• Wages Q1 '10 $110,000 - Wages Q1 '09 $100,000 = $10,000
• 3% of $10,000 = $300.00

What isn't so clear is that whether this credit will be against taxes to be paid to the IRS on a corporate return, or perhaps some form of a credit against employment-related taxes. Since the bill explicitly states that the benefit will be paid quarterly so the business realizes the benefit more quickly, that leads me to believe that it would be against employment-related taxes.  So is the intent to short the employer-paid portion of FICA?  Unlikely.  That is the only portion (other than Federal Unemployment Tax) that could be credited on a quarterly return.  The text of the bill is notoriously unclear on this point. 

Since most small and medium-sized businesses (those that constitute the largest portion of taxpayers and employers in the US) only file tax returns with the IRS on an annual basis, this leaves me to wonder whether this is a credit that would have to be explicitly filed for on a quarterly basis-separate from the process that is the status quo- which in itself may make the time and effort not worthwhile.  And as is standard practice with many S Corporations, many try to show no profit at the turn of their fiscal year so to avoid double-taxation, so there would be again, nothing to credit. 

To be fair, this bill was introduced less than a month ago, will be subject to much debate and evolution, and could have a very positive effect on the employment situation in the US.  But this is a classic example of the devil being in the details.  If the resulting change to the Tax Code is a SMB friendly process for both earning and realizing the credit, then it should be very effective and a win-win for employers and employees.  But should it become a credit not worth persuing, or "toothless" in its benefit, then like much of the other recovery legislation proposed or enacted, its potential benefit will have been lost in translation. 

Now onto healthcare! 

In my last entry, I pontificated about the pro's and con's of the Social Security Administration's eVerify system.  I solicited your commentary on the program, and whether you thought it was a good or bad thing for our employers, and our country.

Well, indirectly the SSA has chimed in.  In a January 18 article published in the Washington Times, an audit conducted by the Inspector General concluded that during 2008 and 2009, the Social Security Administration itself did not eVerify its nearly 20% of its own prospective and new hires.  It also failed to eVerify another 18% within the three days of hire allotted time frame by the program.

What makes this so bad is that all government agencies are supposed to run their new hires through this system, and the SSA is the agency responsible for the program.  It seems to be a classic example of "Do as I say, not as I do".  I am not sure this is the kind of Government role modeling the Department of Homeland Security had in mind when it launched the program.  They either 1.  Believe they are above the very regulation they are tasked with implementing or 2.  Are so procedurally inept that they cannot comply with their own mandate.  You be the judge.

Jim Harper, Director of Information Policy Studies at the Cato institute was quoted in the article.  He states quite accurately, "When this happens in the Government sector, well the upshot is an IG report.  But in the private sector, you are talking about investigations and penalties."

It used to be that when you hired an employee, you relied on the information they provided with their I9 as proof that they had the right to work in the United States.  This proof took the form of various sources of identification issued by the federal government, like a passport, a driver's license or a social security card.  In other words, if they could meet the criteria of the I9 that would be enough for the employer to have "done their part".  In reality what this meant was that you could hire an employee in January who provided you with his or her "proof".  If you were in compliance, you would then retain copies of the W2 and I9 (as well as copies of the identifiication), report this information to your payroll provider and they in turn would report the employee to the State in which the employee was working, to meet that State's (and this is the case in all 50 states) New Hire Reporting requirement.  The chief purpose of the State's New Hire Reporting requirement was to track down deadbeat parents who have not fulfilled their child support duties, and other individuals whom the state and federal government. 

Given the assumption that the employee in question did not have an outstanding obligation to fulfill from the State or another state (they keep a nationwide database with this information), the employee was allowed to work, and be paid for a significant amount of time.  But come the next January, when W2 files are transmitted for the previous year and the IRS and Social Security Administration compare notes, they verify whether or not the SSN provided by that employee matches the employee in question.  Over the last 10-20 years however, there has a dramatic increase of instances of what the Social Security Administration calls an "SSN Mismatch" , and now that the department of Immigration and Naturalization has become part of the Department of Homeland Security, things have changed.  This meant that the employer, having potentially paid this individual over the course of the year, invested time and effort in training, etc, now has to deal with the termination of what may be a good employee, as well creating turnover in a position that was supposedly stable.  It costs time, money effort and hassle for the employer who was in compliance.

There is a new system now in place with the now U.S. Citizenship and Immigration Services, called eVerify, which is similar to the State's New Hire Reporting but with some important and dramatic differences.  It is the child of the IRCA-Immigration Reform and Control Act of 1986, and the IIRIRA-Illegal Immigration Reform and Immigrant Responsibility Act of 1996, and like most things government-mandated, has taken some time to evolve.  First, as of now, it is a voluntary for more employers, and is only required by  federal agencies but also any company who is engaged in business with the U.S. Government.  Every participating employer is required to sign a Memorandum of Understanding that requires the employer to safeguard the information it receives and acknowledge that this information is governed by the Privacy Act and Social Security Act.  The employer or their reporting agent (like a payroll company) would submit data upon hire of new employees for verification, or an "instant match" of the employee's Social Security Number against the Social Security and Department of Homeland Security databases to make sure the employee is authorized to work in the U.S.  The mandated employer would be required to do so as soon as a job offer is accepted and no later than three days after the start of employment. 

The returned result can be an "Employment Authorized"-when there is a match, or a "Tenative Non-Confirmation"-when the information does not match and then the employee is given the opportunity to contest the result.  Whether contested or not, if the final ruling is a "Final Non-Confirmation" then the employer must terminate the individual immediately or notify the DHS that they cotinue to employ the individual. 

On paper, this solves the problem of investing in an employee only to find out they are not eligible to work in the U.S.  Why not mandate it for every employer, or connect it to the New Hire Reporting system?  I suppose that there are a group of employers whose labor pool has a tendency to gravitate to foreign nationals or recent immigrants, but does this not protect them as well?  Doesn't it ensure that jobs do not go to those who are not authorized to work?  There is always the question of accuracy, but according to the eVerify website, from July 2008-Sept 2008 there were 96.9% of individuals became work-authorized within 24 hours, while .3% were "Tenative Non-Confirms" who later resolved to "Employment Authorized", while 2.8% were confirmed mismatches.  If these statistics hold tight in a larger sample, then the program is an absolute success.

What do you think?  Is the eVerify program so good for the country, and its employers that this system should be fully mandated as a step perhaps to replace or accompany the I9 process?  Or is it a violation of our privacy and our civil rights, imposing more requlation and red tape on employers many who are struggling as it is?  Let me know.

To survive and thrive in this economic environment, companies more often are seeking to control expenses by focusing on efficiency.  One way this is happening with larger organizations is by turning to strategic outsourcing arrangements to maximize cost-saving opportunities and reduce the burden of noncritical activities. According to the latest study by Towers Perrin on HR outsourcing (HRO), cost reduction was the top goal driving HRO for 73% of the companies polled in 2009.  While this poll was primarily of companies large enough to have HR departments in the first place, it is a lesson not only applicable to the small and medium marketplace but even more vital to their survival or success. 

Many clients in the SMB marketplace are of 20-100 employees and often do not have a resident HR team.  More likely, the “HR” responsibilities are being handled by an administrator, finance professional or often by the business owner themselves.  This means that not only are HR activities being handled by someone who may not be fully fluent with State and Federal regulation surrounding employment, but who may not be focused enough on it (due to their other job duties or “hats” that they may wear) to stay current, who may, as a result, often make decisions based on hearsay, and draw incorrect conclusions drawn from experience and not necessarily what is legal or right.

While the easiest decision for most companies in this position is to address HR requirements and issues at the point of pain, this can be devastating to a company who allows HR process and strategy to take a back seat in what may be a critical juncture in their growth and maturation, or what many in the consulting world refer to as the “professionalization” of the management of a company.So business owners need to make a decision at their point of significant headcount growth. 

One choice is to take the path of immediate least resistance (the “Point of Pain” approach) which is certainly can be the least expensive, require the least mental and organizational effort, but which may carry a large amount of risk in the form of employment-related claims, litigation and cost the company from a culture and ultimately, competitive perspective.  Another is to recognize their shortfalls, and address transactional HR and its required expertise in some more direct way.  This, in the eyes of many business owners and management teams means the hiring of an “HR Professional” and may not be congruent with their goals for the company P&L. 

But there is another option. HRO, or fractional HR. 

According to the Towers Perrin survey, the emergence of improving service quality (in the form of employees' experience interacting with HR) has become a very strong driver of companies' decisions to outsource. In 2009, 50 percent of those polled said improving HR service quality was a top goal of their HRO efforts--a jump from 33 percent in the 2008 study. Curtailing time-intensive administrative tasks that added minimal value also remained a top reason for outsourcing, with 73 percent of respondents listing "eliminating the distraction of administrative and transactional work" as a top priority for their HRO strategy. 

For the SMB marketplace, adopting fractional HR still often represents adding additional cost where there was none before and this fact makes it a more difficult decision for the management team.  But with some companies (and I know one in particular) this decision does not need to be so binary.  In other words, fractional HR can be more efficiently combined with the execution of the payroll process and as a result, replace a cost already incurred by the SMB. 

And with justification, HRO is simply added value.  A tremendous value at that.

In a recent statement while standing amongst business leaders and small business owners, Governor Deval Patrick recently outlined several vital recommendations to be undertaken by the Commonwealth aimed to reduce the cost of healthcare on businesses and maintain the quality of care in Massachusetts.   

What gives? Is it not clear here that universal healthcare is being achieved in Massachusetts on the backs of small businesses, and that the insurers have systematically passed their increases in the cost of doing business in the Commonwealth onto their customers?  Our own increase at CPHR this year for the same coverage was 29%!  So in response to the further disincentive for companies to do business in Massachusetts, we are now pointing the finger at the insurance companies.  What happens when these "recommendations" are implemented and no insurers will write policies in our state because it’s not profitable?  Will the state further expand MA Healthcare so that it becomes more imposing of a tax to the employer and furthers to dissuade businesses from having employees here? 

For that matter, where in the social contract is it our responsibility as employers to share the burden of cost of our employee’s healthcare?  For most of my clients, whom happen to be in the service business where the employees are the product, it becomes our second highest expense item after payroll itself.  Couldn’t these monies be better deployed in the form of expansion of marketing and sales activity, or new product development?   In other words, spend money that will create jobs and stimulate the economy. 

So shouldn’t healthcare become the responsibility of the employee, and a choice they make alongside of other lifestyle choices such as where they live, what schools they attend and what cars they drive?  And if they make the wrong choices, should not the Governor be pointing the finger at the Commonwealth’s citizens itself. 

Oh wait, that’s how you lose an election!