Unemp audit

[TAX]

Client in WI got a letter from unemp dept regarding audit.
He owns motel. Purchased on 12/01/2006

WI dept is inquiring about payroll records. Client started business in Dec 06. So he has to give records from Dec 20006 - July 2007.

I called auditor and she said following.
“It is not a random audit but some one complained that this client paid cash to some people where as by check to others"

I am CPA. I am not in WI. Any tips or ideas on WI unemployment audit.

[Luis Mopeo]

Client in WI got a letter from unemp dept regarding audit.
He owns motel. Purchased on 12/01/2006

WI dept is inquiring about payroll records. Client started business in Dec 06. So he has to give records from Dec 20006 - July 2007.

I called auditor and she said following.
“It is not a random audit but some one complained that this client paid cash to some people where as by check to others"

I am CPA. I am not in WI. Any tips or ideas on WI unemployment audit.

From the info presented the important issues are not state-specific. States follow their own rules for classifying employees vs. independent contractors, but I believe most states use the same criteria as for federal. I've never heard of someone being classified as an employee under state law that wasn't the same determination for federal.

If the workers paid cash are reclassified as employees instead of independent contractors, the employer will be liable for not only state unemployment, but also worker's comp, and any other state payroll taxes. The state will also likely notify the feds, and the employer will be subject to payroll taxes at the federal level as well.

What does the client say?

[erchess]

Several Questions

1. To OP - I gather that you did not prepare the payroll in question. Do you prepare any payroll and if so do you do any for WI?

2. To Anyone - Is it illegal or even questionable to pay employees in cash as long as you withhold taxes, keep proper records, and pay your share of payroll taxes? (I realize that most cash payments are under the table. I just didn't know that they had to be.)

3. To Anyone - I am an EA whose only training in accounting issues other than taxes was two semesters at the local community college. I got A's and even before I took them I could legally have called myself an Accountant or Bookkeeper in NC. However I do not keep books for anyone because I do not feel competent to do so. However, if I read the relevant IRS and State Pubs, could I do a competent job on payroll?

[Jiggers]

Probably 1099MISC NEC

I would bet that some were paid as contract labor.

There is nothing requiring that wages be paid with checks.

Years ago, some small banks paid their employees in cash so that other employees couldn't access their account to see what they were paid.

[taxmandan]

Dual status can exist

From the info presented the important issues are not state-specific. States follow their own rules for classifying employees vs. independent contractors, but I believe most states use the same criteria as for federal. I've never heard of someone being classified as an employee under state law that wasn't the same determination for federal.

In Orygun it can happen. A person can be classified as an employee by state law and still meet the independent contractor status with the feds. Our state laws are much stricter, the person must meet ALL the criteria to be an IC, unlike the IRS who makes a judgement call based on several but not all the criteria when making the decision.

And most reclass audits here originate from the state, they know that few workers will qualify as IC and there's money to be made from the audits.

[Corduroy Frog]

States have a dog

Orygun and other states really have a dog in the hunt.

IRS, in spite of their preference for independent contractor status, doesn't really lose much if the taxpayer files and pays income tax PLUS self-employment tax.

States lose SUTA money if this happens. One of their auditors once told me - "IRS doesn't care as long as they get their money - WE lose SUTA and (implied) we can only retrieve SIT in a somewhat ineffective matching program with the 1040. We lose SIT because we cannot always assume income was earned in our state."

In the real world of contracting, the 1099-MISC has become the norm, and the employee has become the exception. In recent years, Workers' Comp insurance companies have become aware of this, and include 1099s in their taxable base.

[JohnH]

Workers Comp 7 I/C's

You make an interesting point about Workers Comp and I agree with your statment that insurance companies include it in their base. I often see posts on this and other forums which mention that Workers Comp isn't paid on independent contractors, but that hasn't been my experience. Here in NC, almost every Worker's Comp audit I've handed over the past 10 years includes detailed questions about I/C's. Unless the employer can show evidence that the I/C has their own workers comp coverage, most insurance companies treat these payments just like wages.

[Gretel]

1. To OP - I gather that you did not prepare the payroll in question. Do you prepare any payroll and if so do you do any for WI?

2. To Anyone - Is it illegal or even questionable to pay employees in cash as long as you withhold taxes, keep proper records, and pay your share of payroll taxes? (I realize that most cash payments are under the table. I just didn't know that they had to be.)

3. To Anyone - I am an EA whose only training in accounting issues other than taxes was two semesters at the local community college. I got A's and even before I took them I could legally have called myself an Accountant or Bookkeeper in NC. However I do not keep books for anyone because I do not feel competent to do so. However, if I read the relevant IRS and State Pubs, could I do a competent job on payroll?

I am confident you would do a good job on books as well as on payroll. My state (MT) has a book out (available at the employment office) with all questions regarding being an employer. Maybe your state has too. Besides reading I also would not hesitate to talk to the unemployment and withholding departments and ask them for some guidance. They will be happy to educate you.

[JG EA]

Also realize that these types of audits are very, very common. Almost routine. Just get all the records together and have them in something where you can turn to the section the auditor wants. Check the records against all the W-2's. Have any W-9's available also. Sometimes they are looking for expenses that may be payroll under different categories so have all the books available to look at.

Some big firms, just get all the records or (programs) and put the auditor in a room with the books and let they look all by themselves.

If cash was an issue, would the TP have counted it as as expense? Yes, so it should show up in the books.