Payroll in Practice: 4.15.19

Practitioners’ questions are answered by a payroll and tax consultant who also is an enrolled agent licensed to practice before the Internal Revenue Service.

Question: An employee who normally works the first shift also worked the second shift on a day when we were short-handed. The employee worked 40 hours on first shift and eight hours on the second shift that week. We included the shift differential in his pay for the work performed on the second shift. How does that affect the regular rate of pay for the workweek?

Answer: A shift differential is extra pay for working during less-desirable hours. Because it is paid for something other than working overtime, it is included in the regular rate of pay for purposes of the overtime pay computation.

A shift differential also does not fall under any of the other statutory exemptions such as additional pay for work performed on special days such as holidays or regular days of rest.

Generally, the regular rate of pay is computed by dividing the sum of all compensation paid for work performed during the work week by the number of hours the employee worked during the week. Amounts of compensation that are excluded by statute from the regular rate of pay are not included in the computation.

For example, assume the employee’s first shift rate is $20 an hour and the shift differential is $3 an hour and that during the workweek, the employee worked 40 hours at $20 and eight hours at $23. The employee’s total pay for the workweek is $984. To determine the regular rate of pay, divide $984 by the 48 hours worked. This gives a regular rate of pay for that workweek of $20.50 and the overtime premium is $10.25 an hour.

The use of the half-time method to compute overtime pay is preferable in this case because the regular rate is a blended rate. A blended rate does not lend itself to a time and one-half computation for either of the actual rates paid. The blended rate is a weighted average rate and not the average of the two hourly rates computed as half of $20 plus $23 for $21.50. The weighted average is the rate of pay based on the number of hours worked at each rate.

As an alternative, the employer and employee could agree to compute overtime based on the rate in effect when the overtime was actually worked. This agreement would have to be made before the work is performed. They would also have to agree on which hours constituted the overtime hours. For example, they could agree that the hours outside the employee’s regular shift cause the overtime or, alternatively, the overtime hours are the hours worked after the hours actually worked by the employee crossed the 40-hour threshold for the workweek.

The employer also could compute the overtime based on the highest regular rate paid during the period as that would meet the statutory requirement for overtime compensation by providing overtime pay of at least time and one-half the regular rate of pay.

Question: Our benefits department said an employee had imputed income for excess group-term life insurance coverage for 2018 that was not reported on Forms W-2 and 941. The amounts were $42 for wages and $3.21 for Social Security and Medicare taxes. Do we have to correct the forms for such small amounts?

Answer: Generally, a correction is not required for an inconsequential error on Form W-2, Wage and Tax Statement. However, errors involving a Social Security number, employee name, or a dollar amount are never inconsequential. There is no provision for small dollar amount errors under this exception to the requirement to correct errors.

However, there is a relatively new de minimis safe harbor for certain amounts that are considered de minimis. This exception took effect for W-2s filed in 2017 as relief for employers in response to concerns about potential increases in the number of errors from the Jan. 31 due date for filing all W-2s with the Social Security Administration. Previously the due dates were Feb. 28 for paper forms or March 31 for electronically filed forms.

Under this safe harbor, employers are not required to make adjustments on forms W-2c for any single reported dollar amount that varies from the correct amount by $100 or less or any single reported withholding amount that varies from the correct amount by $25 or less.

If the safe harbor applies, the employer would not have to correct the W-2, and it would be treated as having been filed with all the correct information.

However, the safe harbor would not apply if the employee elects to have the employer issue a correction. If the employee makes that election, the employer is to prepare Form W-2c, Corrected Wage and Tax Statements, within 30 days of the election and file it with the Social Security Administration. The form would be given to the employee. This may also require that the employer file the appropriate amended employer tax return such as Form 941-X, Adjusted Employers Quarterly Federal Tax Return or Claim for Refund, during the quarter that the error was discovered.

The safe harbor only applies to inadvertent errors in amounts on filed or furnished information returns. This includes W-2s as well as other information returns, such as Forms 1099-Misc. The safe harbor does not apply to intentionally misreported amounts or instances when the employer failed furnish forms to employees or to file them with the SSA even if money-amount variances meet the requirements.

Also, this safe harbor may not apply for state or local requirements. For federal purposes, employers are encouraged to voluntarily make corrections so that employees get the proper credit for Social Security purposes.

Information regarding the safe harbor, employee elections, and employer responsibilities and options can be found in Internal Revenue Bulletin 2017-4.

By Patrick Haggerty