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Employee Leasing -- Is It In Your Future?

By Robert Wagner, CPA

Employee leasing is a hot idea! It is a system whereby your employees are on the payroll of a leasing company but you pay their wages, payroll taxes and other related expenses. The restaurant or hotel retains all rights including the right to hire and fire. In short, for a fee the leasing company takes over the administrative tasks associated with your payroll - freeing you to spend more time on making money!

Why the Interest?

Payroll companies, both large and small, have identified employee leasing as a profitable, high-growth area of business. Employee leasing is attractive for payroll companies for several reasons:

  • The service is marketed to their existing customer base.
  • To stay competitive, payroll companies must offer leasing as an option.
  • Employee leasing means more fee revenue for payroll companies.

 

What Are The Benefits?

For restaurant and hotel operators, the decision whether to lease employees is straight-forward. Of the benefits often mentioned by leasing companies, only two really are significant for hotel/restaurant operators. They are:

  1. Money now in exchange for your FICA (45B) tip credit.
  2. Reduced insurance premiums.

Money For Your Tip Credits

The FICA tip credit, first available in 1994, is a dollar for dollar income tax credit employers can take for certain FICA (social security) taxes paid on servers’ tip income. For casual dining restaurants in Atlanta, the FICA tip credit typically works out to $5,000 to $10,000 a year per each $1 million of gross sales. The higher your servers report tip income, the higher your tip credit.

Leasing companies are offering to pay money now for your tip credit! It works like this: As part of its standard service, a leasing company will track each server’s tip credit. As a leased employee, each server is technically the employee of the leasing company. Therefore, the leasing company takes the tip credit at year end on its tax return. In exchange, the leasing company gives the restaurant a dollar (actually a credit against the restaurant’s payroll taxes) for each dollar of tip credit generated by your server.

This is a good arrangement for restaurants for two reasons:

  1. You get your money now rather than waiting until the end of the year when you file your income tax return, and
  2. You won’t have to forego your credit due to the Alternative Minimum Tax - a trap which often delays utilization of the credit.

Lower Insurance Premiums

Leasing companies use the large-volume approach to securing attractive insurance rates which they then pass on to their customers. To determine whether employee leasing insurance premiums are a deal for you, the leasing company will need to look over your payroll and quote a rate for the insurance that is applicable -- workers compensation, health, etc. Be sure you lock in the rate for at least six months to a year. Also, don’t forget to get a quote from the GHTA’s own Hospitality Self Insurers’ Workers’ Comp. Fund.

Be aware that the rates offered by the leasing company are for a wide variety of businesses. If the leasing company takes on a big customer in a high risk industry -- one with high insurance premiums -- look out! You could end up paying for another customer’s high risk through higher annual premiums.

Other Advantages To Leasing

Leasing companies often mention other advantages to their services. However, many of these advantages are of nominal interest to restaurateurs. For example, leasing companies can offer your employees benefits such as 401 (k) plans and cafeteria plans. Only a close evaluation of your current circumstances will determine whether these are features which your company can use. Consult your tax adviser for assistance.

There are a couple services offered by leasing companies which all companies can use. For example, some leasing companies provide at no additional charge an up-to-date employee handbook customized for your business and including statements on sexual harassment and other important issues. In addition, leasing companies will make available to you their safety inspectors -- which they provide in a effort to minimize on-job injuries and related insurance claims.

Here’s The $64,000 Question

Suppose your servers are leased and the IRS finds that they have been under-reporting their tip income. Is the leasing company liable for the payroll taxes or is the restaurant liable? The IRS has not said who is ultimately liable for payroll taxes when servers are leased employees. Furthermore, this uncertainty makes it difficult to decide who should sign the IRS tip reporting agreements -- the TRAC or TRDA. These are crucial, unresolved issues for the hospitality industry. Be sure you have a clear understanding of how the leasing company views its responsibilities for servers’ payroll taxes.

Conclusion

For small to medium size restaurant and hotel operators, employee leasing is here to stay. The question is whether it will save you time and money. Cut through the sales talk and focus on the FICA tip credit and the insurance premium cost issues. You will be well on your way to determining whether employee leasing is in your future.

Robert Wagner is a principal in Robert Wagner & Company, LLC, CPAs. The firm provides tax and accounting services to restaurants, bars and hotels. He can be reached at 404-874-7000, fax 404-874-1132, email: rwagner@bellsouth.net.

 

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