Tips on managing and reducing payroll costs

by Dave Wolfenden, CPA, CVA, MS, Managing Director

Every construction company must pay its employees, so some payroll costs are unavoidable. But precisely how you should go about paying your employees can change over time. What made sense a few years ago may not be as logical or efficient now. Let’s look at some ways contractors can streamline payroll tasks to keep costs down.

Simplify, where feasible
One way to save time and money on payroll activities is to simplify them. Can any hourly employees be converted to salary? Fixed pay saves a lot of time when calculating hours worked, overtime and time off. Obviously, you need to approach this strategy selectively. But if you have, say, a proven, skilled worker who’s ready to become a project manager, converting him or her from hourly to salaried could simplify your payroll at least a little bit.

Upgrade your timecards
As you’re no doubt aware, timecards are key in the construction industry. Requiring hourly employees to submit their cards daily, rather than weekly, can increase accuracy to reduce over- or underpayments. When employees track their time weekly, the margin for error is much greater.

Daily timecards can also help deter false workers’ compensation claims, which cost construction companies thousands of dollars annually. One way to fortify your defense here is to add the following statements to timecards:

  • I was/was not injured today.
  • Describe the injury in detail:
  • I did/did not witness an injury today.
  • Describe the injury in detail:

Another approach is to automate your daily timecards. Collecting paper timecards and manually inputting them into a computer creates major risks of data entry errors because of trouble reading employees’ handwriting. With labor-tracking software, your accounting department won’t have to input anything. Instead, time records are sent wirelessly from the field, allowing office employees to see time punches, activities performed and job locations.

On a similar note, if you’re still cutting hard copy checks to pay wages, consider switching to direct deposit or Automated Clearing House (commonly referred to as “ACH”). Doing so reduces the risk of fraud while eliminating the time and expense of physically printing out and mailing checks. (Employees without bank accounts can receive a prepaid debit card.)

Trim your tax bill
When it comes to payroll taxes, a money-saver to consider is augmenting your workforce with independent contractors. Freelancers pay their own employment and Social Security taxes, and companies typically don’t have to provide benefits. Plus, when project budgets tighten up, it’s relatively easy to eliminate contract positions quickly. Just be sure to approach independent contractor relationships carefully. Under some circumstances, the IRS may seek to reclassify independent contractors as bona fide employees. If it’s successful, you could be put on the hook for payroll taxes and possible penalties.

Construction companies may also be able to lower payroll taxes by offering full-time employees a Flexible Spending Account. Employees use these accounts to spend pretax dollars on health or dependent care expenses, which lowers their taxable income.

Integrate payroll with projects
Having systems in place to tie payroll more directly to projects can help with scheduling, estimating and budgeting. Many construction-specific accounting software packages offer applications that include payroll features to help automate and streamline functions such as timecard entry and direct deposit. They can also enable you to generate standard payroll and certified payroll reports (such as prevailing wage and statements of compliance), as well as conduct equal employment opportunity and benefit/deduction reporting.

A good construction payroll implementation should offer multistate, multilocality and multi-job processing to automatically calculate changing pay rates and different tax rates and deductions. It should also handle the general ledger ramifications of an employee moving from the field (direct costs) to the shop (indirect costs) or to the office (general and administrative labor costs).

Get the right help
If you’re finding yourself completely overwhelmed by payroll responsibilities and costs, there’s always the option of outsourcing payroll processing to a qualified provider. When taking this step, however, make sure to look for one with experience in the construction industry. Above all, consult with your CPA for further information and ideas on managing and reducing payroll costs.

5 payroll errors to avoid

Payroll errors are costly. Here’s a quick list of five of the most common payroll mistakes:

  1. Failing to register the business. Construction companies must see about registering their business in each state, municipality and city in which they perform work — and they are required to withhold and pay the income and employment taxes proper for those jurisdictions.
  2. Deducting the wrong amount. Although federal employment taxes are fairly straightforward, each state, municipality and city has its own rules — and those tax rates frequently change. Ensure state and local tax-rate changes are incorporated into your company’s payroll calculations.
  3. Misclassifying employees. Use worker-classification criteria to determine whether someone is an independent contractor or bona fide employee. The rule on this is: Be careful.
  4. Filing late or paying late. It’s important to stay up to date on all government deadlines, including paying taxes, record keeping, and reporting requirements. The Trust Fund Recovery Penalty imposed by the IRS for late unpaid withholdings can be very steep and incriminate the owners.
  5. Neglecting to provide W-2 and 1099 forms. The IRS imposes penalties on employers if employees aren’t provided with a W-2 by January 31. A penalty also applies to the 1099-MISC form, which must be issued to each independent contractor who was paid $600 or more during the tax year.

We welcome the opportunity to put our construction industry expertise to work for you. To learn more about how our firm can help advance your success, please contact Dave Wolfenden at (302) 254-8240.

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