Does your organization have an opportunity with payroll true-up audits for contractors?

If your organization employs embedded contractors for routine maintenance or long-term capital and construction projects, you should consider assessing whether you are overpaying in tax. Properly negotiated labor rate buildups will have the categories of FICA (Federal Insurance Contributions Act), FUI (Federal Unemployment Insurance), and SUI (State Unemployment Insurance).

When craft labor rates are negotiated, estimated tax rates are applied to calculate the fully burdened labor rate paid by your company, however this is not always the actual or effective tax rates paid by the contractor. For example, there is a SUI “cap” or maximum amount of employees’ wages that are taxed. These caps vary by state, the lowest being $7,000 (several states) and the highest is Washington state at $68,500 (for 2024). If you employ contractors for most of the year, more than likely you are overpaying if an adjustment is not made to the rate schedule during the year (typically not done).

You may be surprised to learn that conducting a payroll true-up can uncover substantial overpayments. Recoveries for large companies that leverage a high number of embedded contract employees are typically well into the six-figure range and in some cases can top seven-figures. The process of “truing-up” gets your organization to breakeven with your contractors, i.e., not over or under paying tax and rates can be adjusted within your rate schedules to get closer to that breakeven in future years.

If you are interested in getting an assessment of your organization’s potential opportunity to implement a true-up audit program, please reach out and we will be happy to advise you.