Trust, But Verify.

At the end of last year, I was talking with two restaurateurs who had experienced the pleaasure of IRS audits. These folks are very sharp operators with highly organized companies. They exemplify the kind of success derived from refined numbers that are drilled down into improved operations.

The audit results were shocking. Though they thought their payroll company had handled all reporting issues correctly, they were on the hook for more than $80,000 in taxes, fees and penalties.

Payroll services are standard operating procedure for good reason:

There is just so much to keep track of!

I have friends who work for payroll services and a friend who owns one, so I’m not one of those who think these companies are the enemy. The best business people know to check that these arcane aspects are being handled and don’t just assume they are.

In one case, the payroll company had figured server overtime incorrectly. It’s reasonable to assume that the payroll service would catch this, but using polled data, their system didn’t compute that they were dealing with tipped employees and tip credit issues.

Granted, server overtime is not very common. But, in this case, they had a specific operational reason for it. (It’s a long story for another time.) The payroll company was taking the tip credit amount of hourly wage at $2.13 and paying time and a half. The correct calculation for server overtime would be minimum wage x 1.5, not $2.13 X 1.5. Have I lost you here? Probably so. It’s no wonder there is a risk that this is being done wrong. The more I mention this in conversation, the more people tell me there is a lot of opportunity out there to clean up this common error.

In the other case, the fine was related to insufficient tip declarations and the failure to file a Form 8027 which details them. The restaurant assumed their accountant would file it. Their accountant assumed the payroll service, who had all the data, would file it. No one filed it. No one was watching that tip declarations were in compliance at the store level either.

So don’t let this happen to you. What do top restaurant owners, and all business owners do? Occasionally look at their bank statements online, payroll runs, credit card statements, and yes, even their Form 8027 Employer’s Annual Information Return of Tip Income and Allocated Tips.

The bottom line?

• Spot Check. Ask questions;
• Emphasize that you are on top of things;
• That helps the people to whom you delegate stay on top of things, too.

We would be interested to hear what other services you may outsource. What are your best tips for monitoring the work of outside services?