Discussion:Payroll question for Audit
From TaxAlmanac
Discussion Forum Index --> Accounting Questions --> Payroll question for Audit
| 8 May 2008 | |
| I am planning the audit for a sole proprietor who has a government contract to provide services. He can't show more than 5% profit or he needs to pay the money back.
On his last audit there was a line item for his payroll. It was a plug to fix his profit at < 5%. This just doesn't seem right to me but I don't know what amount to use either. I could use his draw and do a test to see if it is reasonable compared to what wages would have been paid to do the same job. I feel I need to show actual expenses to show that the contracted amount is being used appropriately for program expenses, etc. Does anyone have any experience with this type of audit that could give me some advice? | |
| May 8, 2008 | |
| First of all, any time there are requirements like this that need to be met, it motivates people to "make it work," (think fraud). In addition, any time the word "plug" is used, it tells me something isn't right.
Sole proprietors don't have payroll unless they have others working for them. Is this "payroll" allowed per the contract? In other words, is a line item allowed for some form of compensation in addition to the 5% profit? | |
RoyDaleOne (talk|edits) said: | 8 May 2008 |
| Karen, your question is not clear enough.
I have done this type audit in the past for consultants working for a State Department of Transportation. The guidelines do not fit well with sole proprietors or partnerships entities, therefore, within, the guidelines I create "salaries" for the owners. The salaries needed to be created to put this type of entity on an equal footing with entities that have owners who do get salaries. Otherwise, your reimbursement rates, or allowed profits would not include an item for owner's salary, wherein, other entities are allowed and do get such allowances in their rates. Architects, engineerings, surveyors, land planners, etc all have this problem if they are trying to do Department of Transportation work and are partnerships or sole proprietors. | |
| 9 May 2008 | |
| Thank you both. He is paid a contracted rate to provide foster care which includes room & board. He is on call 24/7 so I'm not doubting that he deserves every penny he earns. I just have a problem pulling a number from the air to report as salary. I don't like using the 5% profit method because in reality he could be making more or less than that depending on how much money he actually spent caring for the individuals.
Natalie - He is contracted a yearly agreed amount. I just reread his contract and it says funds paid in excess of allowable cost of services provided shall be returned. I will look into those allowable costs. | |
| 9 May 2008 | |
| there ya go Karen - reading and interpreting the contract is key. in there everything allowable should be spelled out. it is possible they are allowed to have wages or it is possible that only living expenses of the people in their care qualify.
good luck | |
| May 9, 2008 | |
| It should be relatively easy to get comparable wage information. Have you tried Robert Half? There are probably many other sources available on the internet. You shouldn't have to just try to make something up. | |
| 10 May 2008 | |
| Been there done that on social service agency audits. You should be able to contact the contracting agency and determine how they expect it to be done. Then figure out what you're actually going to do. Here in PA there are state mandated allowable cost standards. Everything is driven by them. Generally there is some kind of compensation scale involved. Usually related to what the county (state)agency pays their people. | |
| 10 May 2008 | |
| Here's what the PA manual says about it. You should be able to find something for your contracting agency.
(a) If a proprietor of an organization organized for profit performs services as a salaried employe of the organization, a reasonable allowance of compensation for these services is an allowable cost if both of the following apply: (1) The services are actually performed in a necessary function. (2) The person is qualified to perform these services. (b) A reasonable allowance for compensation means that the compensation allowance is an amount that would ordinarily be paid. (c) A necessary function means that if the owner had not rendered the services, another person would have to be employed to perform them. A necessary function also means that the function be pertinent to the operation and sound conduct of the organization. (d) Compensation to voting members of an organization organized for profit is subject to the requirements for directors of nonprofit organizations in order for the cost to be included as an allowable expense. | |
| 10 May 2008 | |
| Thanks for all your guidance. This is my first agency wide audit on my own and I haven't actually started it yet. Just trying to gain as much info as I can first. | |
