Payroll in Practice: 8.4.20

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: We are a new employer and our first holiday is Sept. 7, Labor Day. The company’s policy is that Labor Day is a paid holiday and employees are to be paid for eight hours at their regular rates of pay. However, a few of our employees are scheduled to work the holiday. Based on our policy, they are to be paid double time--eight hours for the holiday and eight hours for working. If working that day puts the employee into overtime, which rate do we use to compute compensation for the overtime hours?

Answer: Kudos to your company for planning ahead on this. Employers should establish a clear holiday policy and to communicate that policy to the employees.

The Fair Labor Standards Act does not require that employees be paid for time not worked or to be provided extra pay for working on holidays. With respect to overtime, the FLSA requires that employees be paid at least one and one-half times their regular hourly rate for any hours worked in excess of 40 during the week.

The employer is not required to count paid time off, such as a holiday, as hours worked for purposes of determining overtime hours. An employee who is paid for the holiday who otherwise works 40 hours during the week is not entitled to overtime pay under the FLSA. However, an employer may be more generous through policy, convention, or contract. Any policy covering those who do not work on the holiday, but are paid for it, may be taken into account in determining the policy for those who work on the holiday.

The treatment of the holiday pay depends on whether compensation is paid for working on the holiday.

When employees are paid eight hours pay for the holiday, regardless of how many hours are worked, the pay is for a special day rather than for working. In this case, the holiday pay is not included in the regular rate of pay and may not be counted toward any required overtime premium for that week.

An example of this would be when an employee is paid straight time for all hours worked on the holiday and also receives eight hours of holiday pay. If the employee also works eight hours of overtime that week, compensation would include eight hours of holiday pay, 40 hours at the employee’s regular straight time rate, and eight hours at one and one-half times the straight-time rate.

However, the FLSA allows the employer to treat premium pay for overtime work on Saturdays, Sundays, holidays, or other special days as overtime premium when it is at least one and one-half times the regular hourly rate of pay.

For example, when an employee is paid double time for all hours worked on the holiday, the holiday premium qualifies as overtime pay and is not included in the regular rate of pay. This may be applied to satisfying the overtime pay requirement for any overtime hours the employee works during the workweek.

For example, an employee who works a holiday and five other days during the workweek (48 hours) is entitled to eight hours of overtime pay. The double-time payment for the holiday meets the legal requirement to pay overtime. Under this arrangement, the employee is paid eight hours at double time and 40 hours at the regular straight time rate. State law may be more generous and must be considered in setting policy. For example, some states require payment of an overtime premium if an employee works more than eight hours on a particular day even if the employee works fewer than 40 hours during that workweek.

The employer may be more generous. There are several ways to handle this, but whatever is decided should be according to a policy. There are significant cost implications and the policy should be well thought out. The important thing is to make sure the minimum requirements of the applicable law, whether state or federal, are met and to think through the implications of the policy for the company and the employees for the long run. Once the policy is determined, put it in writing and share with the employees.

Question: A new hire started work on a Friday but she did not meet with the human resources department until Monday to complete the onboarding process, which included filling out Forms I-9 and W-4. The worker ultimately was ineligible for employment in the U.S. and she did not have a Social Security number. We quickly terminated her employment, but what about the one day she worked for us? How do we handle payment for the wages if we do not have a Social Security number?

Answer: When a worker qualifies as a common-law employee, the employer must treat the worker as an employee. Under the Fair Labor Standards Act and state wage and hour laws, employees must be paid timely for work performed, even if ineligible for employment in the U.S. and is unable to obtain a Social Security number.

The first step is to pay the worker. If your payroll system does not allow processing without a Social Security number, the payment may have to be processed manually and recorded through adjusting-journal entries.

Taxes should be withheld and timely deposited according to the procedure for employee failure to provide a valid 2020 Form W-4, Employee’s Withholding Certificate. Social Security and Medicare taxes should be withheld, along with income tax, as if the employee provided a W-4 claiming “Single or Married Filing Separate” marital status with no entries in Steps 2, 3, and 4.

If the worker is a nonresident alien, you may want to withhold income tax according to the special instructions for nonresident aliens that adjust the taxable wages for disallowance of the standard deduction for purposes of calculating the amount to withhold. For more information, see Page 3 of Internal Revenue Service “Publication 15-T, Federal Income Tax Withholding Methods.”

Form W-2, Wage and Tax Statement, generally must be filed, although there are some cases when that is not required. This may occur if the employer was not required to withhold taxes for income, Social Security, and Medicare, and the employees was paid less than $600.

An employer is required to submit Form W-2 even if a worker’s Social Security number is unavailable. If filed electronically, the number should be reported with nine zeros. The IRS may propose a penalty of $270 for the missing information. The penalty is to rise to $280 in 2021.

Because your new hire’s employment was terminated, you may want to file and furnish the W-2 before year end. A proposed penalty notice, Form 972CG, may be sent to the business, which may explain the circumstances for the missing Social Security number and request that the penalty be waived.

Whether a waiver is requested or the penalty is paid, the employer should review the process that allowed the failure to occur and consider changes to prevent future failures. For example, an employer might establish a new-hire policy that a request for Form W-4 was made and the request was documented.

In the case of a missing Social Security number, the employer must have exercised due diligence and responsibility in obtaining the number. The IRS generally asks that the employer establish that there were significant mitigating factors, such as the employee not providing a correct Social Security number despite a request from the employer.

The employer also must show that steps were taken to avoid the failure, including an initial solicitation for the W-4 at the start of employment and, if required, reasonable follow-up requests. The documented solicitation process is key to establishing reasonable cause to avoid penalties.

While Form I-9, Employment Eligibility Verification, and the W-4 are supposed to be completed by the commencement of employment, the W-4 should be obtained before the worker starts performing services. Form W-4 may be completed without supporting documents, so even the employee does not know her Social Security number the employer can document that the request for the number was made.

IRS “Publication 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs,” covers the requirements for establishing reasonable cause in detail. While the publication’s primary focus is related to information returns such as 1099 Forms, there is a section covering Form W-2 (VII. Form W-2 SSN Solicitations).

By Patrick Haggerty

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