You know you need to collect employee information for each new hire, but do you know how important it is to verify the accuracy of employee information well before tax time? Here’s why you should oversee employee reporting sooner rather than later, what information you need to verify and red flags you can’t ignore.
Why you should verify employee information
The primary reason you should verify employee information is to maintain compliance with the law and avoid costly tax penalties. For example, businesses must hire only those who are legally authorized to work in the United States. Employers should complete Form I-9 to verify eligibility for each employee; failure to do so or to furnish I-9 forms can result in penalties of up to $2,292 per employee. Another example: if you offer compensation for dependent care that allows employees to work, up to $5,000 per employee is exempt from FUTA (Federal Unemployment Tax Act) payroll taxes. If your business is audited, you should be able to verify that such compensation was paid for dependent care and not as a portion of an employee’s standard salary or wages. It’s important to verify information now, so you aren’t caught in a bind during tax season. Verification can take time, so if there’s an issue, you might wind up filing late or reporting false information. Both can result in stiff penalties and fines, and even jeopardize your eligibility for important tax credits such as the 5.4% FUTA tax credit, which effectively reduces your tax liability from 6% to 0.6%. Moreover, procrastinating can result in distractions from other important tasks, especially as you prepare to file and pay during tax time. The sooner you verify employee information, the less you need to worry about accurate reporting and on-time filing when taxes are due.
What employee information needs to be verified?
Best practice is to verify all employee information, especially on government documents. Here are some of the items employers commonly verify.
- Full legal name
- Social security number
- Address and phone number
- Marital status and number of dependents
- Credit score
- Criminal history
- Motor vehicle records
- Employment history
- Citizenship status/eligibility to work
- Payroll tax deductions/withholdings
- Applicant references
In addition, federal, state and local governments might ask for verification of items such as:
- Income, salaries and hourly wages
- Payment exempt compensation (such as dependent care and group term life insurance)
- Health care coverage
- Compensation for fringe benefits (retirement, pension, meals, lodging, etc.)
- Information for WOTC (Work Opportunity Tax Credits), which can reduce tax liability by as much as $2,400 to $9,600 for each new hire
Employers should be able to produce proper documentation to verify employee information for payroll reporting and tax filing. As mentioned, mistakes can be costly. For example, failure to provide correct 1095-C payee statements under the ACA (Affordable Healthcare Act) can result in a penalty of $270 per employee, with a maximum penalty of $3,275,500 per calendar year. Verifying employee information can also help reduce your tax liability: when records are accurate, you’re able to be taxed at the correct rate and identify eligibility for business tax credits and deductions.
7 employee verification red flags
Did you know that 50% of all resumes and applications contain false information? Or that 33% of all business failures are due to employee theft? How about this: 18% of all violent crimes occur in the workplace. Failing to verify employee information can not only land you in legal hot water with tax agencies, but it can also jeopardize your overall business operations. Look out for these red flags when evaluating applicants, onboarding new employees and verifying employee information.
Inaccurate or false information
Applicants and employees who intentionally lie on their resumes are major cause for concern. Though some discrepancies have valid explanations, others may be an indication that another candidate is a safer choice. In addition, obviously incorrect social security numbers and other personal identification information (or the inability to produce identification documents) are major red flags.
Ineligibility to work
Employees must be eligible to work in the United States. Eligibility status isn’t difficult to verify, but overlooking eligibility could cause tremendous headaches for your business if you unwittingly hire an illegal alien or other unauthorized employee.
Unverifiable employment history
You call to confirm employment history, but every company listed is either “defunct” or has never heard of your applicant or employee. Or, job titles, duties and salaries do not sync with an employee’s stated employment history. In addition, a history of termination is a quick way to identify potential bad apples. These are all red flags that should be discovered during applicant screening and employee onboarding.
You don’t want to overlook the importance of criminal background checks. If an employee has a history of theft, violence or other illegal behavior, it can put your business at risk and even jeopardize the safety and well-being of other employees.
Though it stands to reason most applicants will only list people they’re certain will vouch for them, it’s important to exercise due diligence and call each reference. If references do not seem to exist, do not wish to speak about a potential employee or if they give poor reviews, that should weigh heavily in your decision making.
Inadequate work history
Applicants who have inadequate work histories or have large gaps in employment could represent red flags. Of course, it’s quite possible an applicant has a satisfactory explanation for an employment gap – a parent might have taken time off to raise children, for example, or a health condition might have necessitated an extended leave – but if the gap was due to imprisonment or simply an unwillingness to secure gainful employment, it should give you pause.
Constant relocation or an inability to verify information
Though moving frequently isn’t necessarily a red flag, if an applicant constantly relocates, it might be a good idea to find out why. More importantly, if an applicant can’t furnish documents that verify elementary information such as legal name, address and social security number, that should trigger an alarm.
How to verify employee information
By now, you know how important it is to verify employee information as soon as possible, as well as some major red flags to look out for. The next step is to undergo the employee verification process. You could verify employee information on your own. However, that’s time-consuming and potentially costly if you pay HR or payroll employees to do it. You’ll need to manually file and scan employee documents, make phone calls to verify information and references, contact law enforcement agencies to conduct background checks and follow up on potential red flags. Once verified, you’ll also need to complete the employee onboarding process, including adding withholdings and deductions, categorizing compensation and classifying employees properly to help ensure accurate reporting, timely payments and tax filings – not to mention timekeeping and benefits tracking for payroll purposes. Alternatively, you can outsource employee verification and payroll to a provider who has the expertise and experience needed to help you verify employee information, comply with all tax laws and potentially limit your overall tax liability. Deluxe Payroll can help. We have a suite of services designed to help businesses, both large and small, meet their employee verification and tax obligations, including:
Employee onboarding with SSN verification
Our cloud-based online HCM platform can save your HR team significant time during the employee onboarding process. It features guided tasks so employees can submit their information, which then flows seamlessly to a payroll system and captures completed forms such as Form I-9 and Form W-4. The system can also collect direct deposit information, WOTC documentation, Equal Employment Opportunity information and more. Social Security Number verification is a free option available through the employee onboarding solution.
Background checks and employee screening
Deluxe Payroll partners with National Crime Search (NCS) to offer instant, affordable background checks. The national criminal and sex offender directory includes more than 507 million criminal records spanning all 50 states and Washington, D.C. You can use it to conduct instant criminal background and sex offender checks, check county criminal histories, view motor vehicle records, verify social security numbers and track address histories to help you make informed hires.
Business tax credit screening
Automate the WOTC screening and application process to help ensure your business receives appropriate tax credits. Deluxe Payroll even automates the documentation you need to complete Form 5884. This can help you hire employees who might significantly reduce your tax obligations – anywhere from hundreds to tens of thousands of dollars in tax savings per qualified new hire. Targeted groups include veterans, public assistance recipients and designated community residents, and there is no limit to the number of individuals an employer can hire to qualify to claim the tax credit.
Our Affordable Care Act compliance reporting solution helps track employee eligibility, affordability and large employer status for your organization on an ongoing basis. The platform is 100% automated so it’s easy to evaluate, modify and report on your compliance in an instant. It includes individual employee tracking, payroll integration, eligibility notifications, early warning alerts, easy-to-read reports and more, all packaged in an at-a-glance dashboard.
From employee checks and payroll register to identifying tax credits and deductions, Deluxe offers payroll management and tax compliance solutions designed to help you save time and money while meeting your obligations – all without overpaying.
Editor's note: This blog post was deemed accurate at the time of publication and may not reflect recent changes related to payroll law. The information provided in this blog does not, and is not intended to, constitute legal or financial advice.
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