Payroll in Practice: 10.17.2022

Question: Once an employer has agreed to payroll deductions and payments under a voluntary payroll deduction agreement in settlement of an employee’s tax liability, can the employer withdraw from the agreement? Or must the employer continue to participate until the debt is satisfied?

Answer: Form 2159, Payroll Deduction Agreement, is used to establish an agreement between the employee, the employer, and the IRS to satisfy an employee’s federal tax debt. The employer’s role in the agreement is to withhold a specified amount from the employee’s wages and submit the withheld amounts to the IRS.

As with a traditional installment agreement, the IRS and employee agree on the amount of the payments. Then the employee asks the employer to withhold that amount and deposit it with the IRS. The employer is not obligated to participate in the agreement. In that sense, the agreement differs from a requirement to withhold under a lock-in letter or a wage garnishment.

The Form 2159 instructions to the employer state, “The amount of the liability shown on the form may not include all penalties and interest provided by law. Please continue to make payments unless IRS notifies you to stop.”

This highlights one of the agreement’s disadvantages to the employee. If the IRS fails to timely notify the employer when the debt has been satisfied, the employer is likely to withhold and remit more than the employee owes. The employee cannot recover those funds from the IRS until the debt is cleared.

There are some situations in which the employer would stop withholding and depositing the amount specified in the agreement. For example, the employee might no longer work for the employer, or the employee’s wages for the period might be insufficient for the agreed upon deduction. In such cases, the agreement specifies that the employee is to contact the IRS. There is no similar requirement for the employer.

If the employer unilaterally withdraws before receiving a notice from the IRS, there could be consequences for the employee if the employee is unable to notify the IRS and make other arrangements. The potential consequences include additional fees, termination of the agreement, a negative impact on the employee’s credit report, and lien or levy actions against the employee’s property.

Form 2159 and its instructions do not provide a process through which a participating employer may withdraw from the agreement. However, the IRS views the payroll deduction agreement as a useful tool. It seems unlikely that it would want to make this tool less attractive to employers by making it difficult for them to withdraw. An employer can contact the IRS and ask how the employer may withdraw. The IRS’s phone number is included in Form 2159 instructions.

Coordinating with the IRS and the employee to change the employee’s installment agreement might be a good approach. For example, all parties might agree to a transition from a payroll deduction to a direct debit from the employee’s bank account or direct payments from the employee.

Question: Should employers have their exempt employees clock in and out and then approve their timecards each week before processing payroll?

Answer: The Fair Labor Standards Act provides several exemptions from the requirements for employers to pay the minimum wage, overtime compensation, or both. It is assumed here that the term “exempt employees” refers to employees that are exempt from both requirements under the executive, administrative, or professional exemptions. These are collectively known as “white collar” exemptions.

The FLSA requires that the employer track hours worked for nonexempt employees and employees who are exempt from either the minimum wage requirement or the overtime requirement but not both. Knowing the hours worked is necessary to determine if employees have been paid at least minimum wage and at what point they become entitled to overtime compensation.

Employees are entitled to at least the highest applicable minimum wage rate for each hour worked in a workweek, under the minimum wage requirement. Since the minimum wage is an hourly rate, compliance can be determined only by converting the employee’s total compensation for the week to an hourly rate regardless of the method by which the employee’s compensation is normally determined.

Compensation methods could include pay on an hourly, salary, piece work, commission, or other basis. An employee’s compensation might also consist of a combination of methods. The employee’s total compensation for the workweek is divided by the number of hours worked to determine the employee’s regular hourly rate of pay to determine if the minimum wage requirement was met. To determine whether the employer meets the minimum wage requirement, it must determine the worker’s regular rate of pay. To do so, the employer divides the employee’s total compensation for the workweek by the total number of hours worked. The regular rate should be at least equal to the highest applicable minimum wage rate.

The FLSA overtime compensation requirement is met if employees paid at least 1.5 times the employee’s regular rate of pay for all hours worked in excess of the maximum hours that an employee may work without receiving additional compensation. Currently, under the FLSA, the maximum hours is 40 hours. Except under child labor laws, an employee may work any number of hours during a workweek. State wage and hour laws often differ from the FLSA. The rules most favorable to the employee apply.

Under the FLSA, an employer may track hours worked by exempt employees, but it is not required. However, some states, such as Illinois, require employers to track the hours worked of both exempt and nonexempt employees. Whether an employer elects to track hours depends on the business and its need for the data.

There are several good reasons for an employer to track the hours of exempt employees. One reason is the potential that nonexempt employees have been misclassified as exempt. If employees are determined to have been misclassified the employer may be required to retroactively convert them to nonexempt and compute back pay, including overtime compensation, for the reclassified employees. If an employer has not kept records of hours worked, the employer might be unable dispute employee claims as to the number of overtime hours worked.

Another reason to track employee work hours is to obtain information needed for financial and operation reporting, which might include:

• Determination of hours billable to clients, such as in a law firm or CPA practice.
• Allocating employee compensation for cost accounting or financial reporting.
• Accrual of fringe benefits such vacation, or mandated benefits such as paid sick leave under state or local law (e.g., one hour of paid sick leave accrual for each 40 hours of work).
• Employee issues involving a high number of hours worked such as burnout, retention, or work/life balance.
• Employee issues regarding excess absences from work such as regularly arriving late, leaving early, or partial-day absences.
• Performance evaluation and compensation purposes, such as overall productivity.
• Compliance with leave requirements under the Family and Medical Leave Act.
• Scheduling to meet the business’s workload and coverage requirements.
• Additional compensation for overtime work.

The method of tracking hours is up to the employer. Clocking in and out is not required and can be misleading. For example, an employer used a time keeping system where employees swiped their ID cards to enter the plant. Some employees clocked in early to have coffee with coworkers before their shift started and some employees stayed after work to exercise in the on-site fitness center. The time clock readings had to be adjusted by the supervisors to reflect hours actually worked.

Another method of tracking time, particularly for salaried employees, involve self-tracking on a time sheet and an exception system. For example, assume employees work a 35-hour workweek. If the employee works more or less than 35 hours during a particular workweek, an exception report is generated, and the time record is adjusted accordingly.

Work-from-home situations have created new challenges to tracking hours, with the recognition that time an employee appears to be logged onto their computer is not necessarily tracking actual work time.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, N.C., and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.