The CPA’s Guide to Assisting Clients with Business Compliance Issues
As a CPA, you probably sometimes find that clients inquire about more than just their business’s taxes and finances. With the strong connection between their money and all aspects of their companies, they may toss you questions about a variety of business compliance issues that aren’t in your normal area of focus.
You need to exercise caution in responding because your insight shouldn’t take the place of proper legal counsel or human resources guidance. But having a working knowledge of diverse compliance topics can help you aid your client’s understanding of certain issues and steer them to the right resources.
The questions you might hear from startup entrepreneurs and existing business owners include those business compliance issues that fall into the categories of:
- Human resources laws and regulations
- Business formation and business entity requirements
Human Resources Laws and Regulations
Businesses that violate the hiring, employee relations, and safety rules of the United States Department of Labor and other government agencies put their companies at risk of serious penalties. They must understand and abide by the rules of the FLSA (Fair Labor Standards Act) and OSHA (Occupational Safety and Health Administration). An attorney that specializes in employment law and HR professionals can help them establish and maintain compliant processes and procedures. I’ve listed some of the employment-related issues that your clients may face below. Realize this is an overview for informational purposes. It is not meant as legal advice, and your clients should seek the guidance of a lawyer and human resources expert to make sure they understand the specific requirements that apply to them.
1. Worker Classification
Employee or independent contractor? Your clients need to take care to classify their workers correctly. As you know, employers must withhold federal, state, and local taxes from their employees’ paychecks but not from the payments to independent contractors.
Some of the criteria that indicate workers are independent contractors rather than employees include:
- They have a “work for hire” or “independent contractor” agreement with your client.
- They get compensated based on invoices they send your client.
- They use their own equipment and software to do the work they do for your client.
- Your client does not manage their work (e.g., hours that they work, how they do their work, or where they do their work).
The employee or independent contractor status also affects company benefits. While your clients may be required to provide certain benefits to workers on their payrolls, they do not need to do so for independent contractors.
When using independent contractors, your clients can help make the status clear by requesting a W-9 (Request for Taxpayer Identification Number and Certification) forms before those individuals do any work for their companies.
2. Anti-Discriminatory Hiring Practices
When hiring employees, your clients must avoid discriminatory practices—whether intentional or accidental. If they’re not careful, they’ll risk becoming the target of complaints and possibly lawsuits. All aspects of the hiring process (e.g., job applications, interviews, background checks, etc.) must comply with federal, state, and local municipality laws. A few of the federal laws enforced by the EEOC (U.S. Equal Employment Opportunity Commission) that your clients should familiarize themselves with include:
- American with Disabilities Act (ADA)
- Age Discrimination in Employment Act (ADEA)
- Equal Pay Act
And your clients should be vigilant in taking measures to avoid sexual harassment in the workplace. This highly visible and extremely sensitive issue requires awareness and education. Title VII of the Civil Rights Act of 1964 considers sexual harassment a form of sexual discrimination.
3. Minimum Wage
At the time of this post, the federal minimum wage is $7.25 (which has been in place since 2009). Your clients should know, however, that many states have their own minimum wage requirement.
The FLSA requires employers to pay employees overtime pay of at least time and one-half of their regular pay rates for any time worked beyond 40 hours in a workweek. Note that there are some exemptions to the rule, based on the nature of an employee’s position with the company and salary.
If the state law is different from the federal law, your client will need to abide by the one that’s most favorable to employees.
5. Minimum Employment Age
In most cases, FLSA considers 14 years of age the minimum age for employment. Clients who hire employees under age 16 must be aware that those employees cannot work more than a specified number of hours per week. For employees 16 years old and over, the Act states no limit on the number of hours they may work. Federal law also prohibits employing a minor to do jobs considered dangerous. Some examples include excavation work, operating certain types of equipment, and driving. States have their own laws regarding employing minors, and your clients must follow the law that offers the most protection to their young employees.
6. Family and Medical Leave (FMLA)
Something that your business clients should consider as they plan their finances is FMLA requirements. The Family and Medical Leave Act requires that employers give certain employees up to 12 weeks of unpaid leave per year (without fear of losing their jobs) to tend to certain family or medical situations.
Per FMLA rules, employee eligibility requirements include:
- Must have worked for the employer for at least 12 months
- Must have worked at least 1,250 hours over the past 12 months
- Must work at a location where the employer has 50 or more employees within 75 miles
7. Unemployment Insurance
Your clients should also be aware of the requirement to participate in the Federal-State Unemployment Insurance Program, which provides temporary compensation to eligible employees who meet state-specified eligibility requirements and became unemployed through no fault of their own. In many states, the program is funded solely via a tax on employers.
8. Medical Coverage
Things are in flux with health care, but at the time of this post, the Affordable Care Act rules still apply. Businesses with an average per month of 50 or more full-time (or full-time equivalent) employees must provide affordable minimum essential health coverage to their full-time employees. Failure to do so results in a penalty.
9. Workers’ Compensation
Another requirement your business clients will need to budget for is insurance to cover costs (medical expenses and wages) of employment-related injuries and illnesses suffered by employees. States have their own workers’ compensation insurance programs, so your clients should research the rules and costs that apply to them. Generally, the insurance covers illnesses and injuries regardless of who was at fault.
The above considerations represent a small sampling of the many employment-related topics your clients may need to discuss with their lawyers and HR professionals
Business Formation And Business Entity Requirements
Whether your clients are in the process of starting or growing a business, they might wonder about the steps involved in legitimately forming a business entity type or the tasks they need to complete on an ongoing basis to keep their existing business in good standing. Some of their inquiries may flow naturally into your area of expertise while others may require you to align clients with other resources. For example, business owners should talk with their attorney to get the lowdown on legal requirements for their specific type of business and their location.
And for clients who have already consulted with you and their lawyer to determine legal and tax-related details, you can enhance customer trust and loyalty by giving them a way to save them time and money on their business formation and compliance filings.
1. Changing Their Business Entity Type
Perhaps you’re working with a sole proprietor who wants to protect personal assets while running her company. Or maybe the owners of a multi-member LLC (Limited Liability Company) have decided they want to be able to sell stock to raise funds to expand their business. In these situations and others, your clients must submit documentation to legally form or change their business entities.
Examples of business formation paperwork by business entity type include:
- Articles of Organization – LLC
- Articles of Incorporation – Corporation
- Certificate of Conversion – To convert an LLC to a corporation
- Election by a Small Business Corporation – S Corporation election
- Certificate of Authority – For foreign qualification to operate an LLC or corporation outside of the state in which it was formed
2. Obtaining an EIN
As you advise your clients that they’ll need an EIN (Employer Identification Number) to hire employees, set up a bank account, and file their taxes, they may ask about the cost and where they get one. EINs are free of charge from the U.S. Patent and Trademark Office.
3. Applying for Business Licenses and Permits
Many of your clients may need certain business licenses and permits to legally operate their companies at their location. The requirements will depend upon where they are and what they do. Some businesses might require federal, state, county, and local licenses and permits, so it’s essential that their owners check to find out what requirements apply to them.
CorpNet can assist with determining licensing requirements and completing and submitting the paperwork.
4. Designating a Registered Agent
Your LLC and corporation clients must assign a registered agent to receive service of process (state and federal correspondence, legal notices, corporate filing notifications, and other important paperwork) on their behalf.
5. Submitting Annual Reports
Some states require LLCs and corporations to submit annual reports or “statements of information” so companies’ vital information is up-to-date in the state records. In the states that require them, the required deadline may be annual, every two years, or on some other schedule. Sometimes, the filing deadline for an annual report may be aligned with the deadline to file other state taxes.
6. Closing a Business
When clients have decided to cease doing business, they must officially notify the state(s) in which they operate their companies by submitting Articles of Dissolution. If they do not formally close their businesses with the state, they continue to bear the responsibilities of filing reports, paying taxes, and performing other compliance tasks.article written by Nellie Akalp