How to Avoid Costly Mistakes in Payroll and Taxes: IRS insider & CPA Charles Read

Freddy D: 00:01:46

Today's guest is Charles Reed, a certified public accountant, cpa, US Tax Court Practitioner, ustcp, former member of the Internal Revenue Service Advisory Council, Vietnam veteran, and founder of Get Payroll. Charles brings over 50 years of financial leadership experience across a wide range of Industries.

Since: 1991

Charles is a true financial expert who teaches business owners how to properly set up payroll and avoid costly IRS penalties. As an IRS insider, he shares powerful strategies to beat tax penalties and stay compliant.

A veteran business owner for over 30 years and a Vietnam War veteran, Charles blends his life experience with deep professional insight. He's also been featured in over 400 media outlets, including Fox News, Forbes, Huffington Post, and many more.

Freddy D: 00:02:55

Welcome Charles Reed with Get Payroll to the Business Superfans podcast show. How are you this morning, Charles?

Charles Read: 00:03:04

I am very well, thank you. And thank you for having me on.

Freddy D: 00:03:07

Yeah, we're excited to have you on.

As we talked before the show, we got a lot of things that we can really inspire our small midsize business owners about the fun topic of finance and taxes and accounting and all that good stuff. So what's the backstory of how did you get started with Get Payroll?

Charles Read: 00:03:26

Well, I'm a Midwest boy, I grew up in Iowa, went in the military, spent four years in Marine Corps, got out married, found that business, did not value my military experience.

So went to college, got my bba, my mba, sat for and passed my CPA exam while I was still in graduate school, went to work for Texas Instruments, spent 15 years in the corporate world, small businesses, large businesses, startups, turnarounds. Realized I was never going to get to the top of a major corporation and didn't have the political skills.

I'm unwilling to stab people in the back and toss it off the ladder. So if I wanted to run a business and I grew up in a family business, I was going to have to start my own.

So just over a third of a century ago, my wife and I started a business. I hung on my shingles as cpa. She was in the office with me. We grew the business, took on a partner, did a lot of payroll for our clients.

About a dozen years ago, sold off the accounting portion to my partner and kept the payroll company and have continued to grow it. Get Payroll is a national payroll company and we provide payroll services to small and medium sized businesses around the United States.

Freddy D: 00:04:31

You've seen a thing or two in your time regarding books.

Charles Read: 00:04:35

Yes.

Freddy D: 00:04:36

So what is the biggest thing that you see that small to mid sized businesses do inappropriately with their books?

Charles Read: 00:04:43

Well, they don't know what they don't know, and that's the problem.

They don't understand what they should be doing, how to classify expenses, how to create a P and L effectively how a balance sheet works and how these things really tell you what's going on in your business in ways that you can't understand if you don't look at them, understand them and correctly produce them. So if you're not familiar with how to do it, get somebody that is.

If you're not a cpa, you probably need to talk to one and have them come in monthly, quarterly, and help you create your books and understand them.

Besides that, your bank and your lawyer and the irs, everybody else will be very happy to see good, solid, properly produced financial statements and records.

Freddy D: 00:05:34

My experience, and I'm sure you've seen the same thing, is a lot of people just look at, wow, my revenue and look, I'm making money and I have money in the bank, I'm paying the bills and I think I'm profitable and I'm using that keyword, I think I'm profitable because they don't really know whether they're profitable or not. Looks like it. I've got money left over.

But in reality they may not be because things like you said may not be classified correctly and they're not looking at their net income properly and a.

Charles Read: 00:06:02

Multitude of other things and they're not looking at changes. For instance, you take a restaurant, maybe you're figuring, you know, sit down dining, you want a 30% food cost.

Well, if that's 31 and then 32 and then 33 and 35 and 37, you've got a problem. You just don't know it yet.

Freddy D: 00:06:20

Right.

Charles Read: 00:06:20

If you're not looking at those numbers, they can. Lots of times the financials can warn you of things that are happening before they become disasters.

So not only is it a record of history, and accountants tend to treat these things as stale old books. That's a snapshot of the past. But in reality, properly used, they can instruct you in what you need to be doing going forward.

You can see trends, you can see changes. To know what's happening in your business, the key in any business is to work on your business, not in your business.

And working on your business means you need to understand what's going on in detail on the financial Side.

Freddy D: 00:07:02

Yeah, especially too with payroll, because that you've got some big issues. If you've got taxes inappropriate, you don't pay into the government properly.

And that's state, federal, I mean, that opens up a whole can of worms for your business. And you're inviting a microscopic check of everything in your books if you have a problem.

Charles Read: 00:07:26

There's a lot of things going on in payroll.

One of the things people don't understand is certain of the taxes that you pay in employment, taxes you owe personally, if they don't get paid, they're not dischargeable in bankruptcy.

The portion of the income that you withhold from employees and you're supposed to deposit for them, that becomes a liability of the responsible parties in the business. Regardless of what happens.

They can come after, if it's not paid, they can come after the business, they come after you personally, they can take your house, and they do. And I've seen it happen. So you've got to be very careful. Misclassification that you were talking about is rampant.

The IR estimates that 70% of businesses misclassify employees, either as contractors versus employees or hourly versus salary. So. And those things are not choice. You don't get to choose that. There's a whole body of law that defines all these things.

And if you don't understand that, get with somebody that does.

Freddy D: 00:08:26

Yeah, because I know of a company where they got audited because of the fact that they thought the independent contractors were really employees and they were really independent contractors, but the company didn't have it configured correctly, didn't track it correctly, didn't have contracts with these people properly. And they prevailed in the end. But they had to get a heavy duty lawyer that went through and they spent a ton of money getting that cleaned up.

, what's a: 1099

And how do you make sure you don't screw that up?

Charles Read: 00:09:17

And the problem with that is the law changes. When Trump came into office the first time, he proposed through his labor secretary, a new rule about independent contractors.

Well, when Biden was elected, they voided that rule and they late in their administration institute a new rule which, depending upon how the courts interpret it, could eliminate the gig economy. Because they said that if an independent contractor work is integral to the business, then they're an employee.

How that'll be interpreted by the courts, God only knows. But that could eliminate. I mean, what business pays somebody to for work that's not integral to their business? Okay.

So by definition, there are no independent contractors.

I suspect that the new Labor Secretary will have that rule voided here shortly and will reinstitute Trump's previous rule about independent contractors. But there's a whole body of law beyond the regulations that the Labor Department issues, case law and then common law.

There's 20 common law rules that are the base for, for what's an independent contractor slash agent versus an employee. And a preponderance of those determines whether you're a contractor or not. And that's what the courts look at in the end.

But there's a lot of regulations and the states have their own regulations. We've run into that in Texas. We've had hearings with the workforce Commission.

We've won, but it was expensive again, so it's nice if you can come to an understanding with the agencies. If you have a question, you need to understand what you're doing so you make sure that everything you have is in order.

So if it comes to an audit, a legal case, you have all your ducks in a row and have all your paperwork. And if you do, you will probably prevail.

There's no guarantee in court, of course, but if you don't have it tied down, you don't have it detailed out. If anything, that's ambiguous, you haven't tapered up, you'll lose. And that's very expensive.

Freddy D: 00:11:19

Absolutely.

Because of the simple fact that you've got no data, you've got nothing to help present your position because you're empty handed, you winged it versus putting a strategy in place.

Charles Read: 00:11:32

Right. And in some cases there are safe harbors.

But if you can't avail yourself of that safe harbor, they can go back literally to day one for taxes, penalties and interest.

Freddy D: 00:11:43

Wow, that gets serious there.

Charles Read: 00:11:45

I've seen companies be put out of business because of it.

Freddy D: 00:11:48

Oh, yeah, let's say a business been in business for 20 years and all of a sudden they come in and do an audit. And if they go back to day one, that business is out of business.

Charles Read: 00:11:58

Absolutely. Frequently. But it does happen. Let your attorney handle it.

Don't get sideways with them because all you're going to do is piss them off and they'll get vindictive.

Freddy D: 00:12:06

You don't have a choice in the matter. No, you got to play by their rules. Because it's their rules, it's their game.

Charles Read: 00:12:12

Yeah, you have access to the courts, but again, they deal with the courts all the Time. So they're experienced, you're not.

Freddy D: 00:12:20

Right. It's their game.

Charles Read: 00:12:21

Yeah.

Freddy D: 00:12:22

You're going into their arena. So let's talk about why a small SMB should really outsource their payroll versus trying to do it themselves.

Charles Read: 00:12:32

The first thing is, you don't know what you don't know. A payroll company like mine, we get newsletters from the IRS every week.

We take the trades, we go to classes, we have seminars, we have professional development. We have the resources to stay on top of all the changes. That's our job. That's what we do for our clients.

We have the software, we have the hardware, we have the facilities, we have the check stock that's very, very well vetted by our associations to make it as fraud proof as possible. We have banking relationships. We have relationships with the irs. We do the electronic transfers. We do them daily.

This is stuff that we do and do on a constant basis. It's our business. We're very familiar with it. On top of that, there's a high level of security. You don't have things laying around the office.

We prevent fraud. Anytime you write a check of your own, you take the risk of fraud.

You're giving a fraud artist everything he needs to know to take things out of your bank account. If it's coming on check out of our trust account for your employee, we have positive pay on that with our bank.

We have systems in place to prevent fraud. We prefer to electronic transfer, electronic deposit, which is difficult for a small business to do.

We can handle that for all your employees nationwide, quickly, easily and inexpensively. We can provide debit cards. There's nothing you couldn't do as a small business.

If you're willing to spend the money, you can hire somebody like me to oversee your payroll. You'll pay six figures, but if that's what you want, that's fine.

And on top of that, you'll have to have dedicated equipment and facilities and security all in place to prevent that. Your bank isn't going to be very forgiving if there's fraud on your checking account. It happens all the time. Check fraud's a huge thing.

So there's just a million reasons to not only save money, provide security, reduce fraud, reduce your time, because your time spending doing payroll. Why not let us do it? We have the systems to do it. And wouldn't you rather have your time to work on your business?

That's where your money's coming from. Your money's not coming from doing payroll. Your money's coming from your business.

Your Revenue is coming from your product, your service, your people. It's not coming from clerical tasks that have to be done. They have to be done and done right.

If you screw up your employees payroll, very often they're not going to stick around. That's something we're cognizant of. Our mission is to deliver a perfect payroll on time, every time.

And sometimes we have to jump through some hoops to make that happen. But that's our goal and we work very hard at it.

If you've got other things going on in your business or you're sick or your payroll person is in a car wreck or whatever, what the hell do you do? There's a million things that can go wrong and forbidden. You can use us.

Freddy D: 00:15:20

Sure. So, Charles, share with our listeners a company that you stepped in that was a mess and how you guys turned it around.

Charles Read: 00:15:28

Well, let me give you a good story. This one took nine years to resolve. The client had filed their W2s incorrectly. They had two payrolls.

They had a workers payroll and they had an officer's payroll. And when they went to file the W2s, they only filed the officer's payroll. They didn't file the workers payroll. They didn't combine the files.

Well, about a year later, they got a notice. They called us. We got into it. We immediately filed the correct file for them. We filed it over and over as we got further requests from the IRS.

The IRS then issued an $80,000 penalty for the misfiling because they said they hadn't been filed properly. We fought that all the way through the various levels of appeals. And there's multiple levels of appeals within the irs.

And you keep going up the ladder. And when you finish with appeals, if you still don't have it, you go to tax court.

Which is why I became a US Tax Court practitioner, to be able to do that. But this one went on and on.

And I finally got to the level of the area supervisor who's above multiple appeals offices, and he wouldn't return my phone calls. I called him every two weeks for a year. Finally, I called the deputy chief of appeals in D.C.

who I'd met when I was on the IRS Advisory Council and said, I understand this guy works for you and he won't return my phone calls. She said, well, I'll have him call you. He called me that afternoon. Amazing how that happens.

So we talked and I sent in the paperwork and we agreed to place it at another appeals office and have the case reworked. 90 days later, my client got a $400 refund instead of a $95,000 interest and penalty bill. Wow.

So a lot of these things can be solved if you know what you're doing. This is something I do all the time. So I knew the steps to go and knew the contacts and where to go to get the problem solved.

He didn't have the knowledge to do it. And his attorney afterwards said to me, charles, if I ever run across something like this again, I'm calling you.

Because it was outside of his level of skills as well.

Freddy D: 00:17:22

Right. So what you just did is you created a super fan, as I would call you created a business super fan out of that customer for life.

Charles Read: 00:17:32

Absolutely.

Freddy D: 00:17:32

Because saving them 95k is a big chunk of cash.

Charles Read: 00:17:37

It is to me, too.

Freddy D: 00:17:38

Well, it's everybody. And unless you're a billionaire, then it's 10 cents.

But still, the fact that you went through all those steps, I mean, that's got to be one of your biggest champions.

Charles Read: 00:17:50

Yes, absolutely.

Freddy D: 00:17:51

And that's why I would call him a super fan, because they're out there promoting your services. And your skill set, along with that lawyer is also super fan of you because he couldn't do it. It was your skill set that made the difference.

Charles Read: 00:18:04

And in that way, one of the things we love to do is to build loyal clients. And there's a difference between happy clients and loyal clients. Loyal clients will stick with you through thicker, thin.

Happy clients, you can piss off and they'll leave. Loyal clients, you can screw up, they still won't go away. So you want to build that loyalty within your customer base.

That's, to me, a critical thing to do. I have a client, she's now retired, and I do the work for her. She sold her company. We do the payroll for the people that bought it.

Carol talked to me, and she said, I have people call me about once a week to want to do my payroll. And I just tell them, no, I, Charles, do my payroll. They say, well, we can do it cheaper than Charles does.

And she says, I don't care if you can do it for free. I'm not leaving Charles. That's loyalty.

Freddy D: 00:18:53

It's a super fan.

Charles Read: 00:18:54

If you can build that into your client base, it's incredible. They will tell everybody else, those are super fans.

Freddy D: 00:19:02

That's how you create superfans.

Because in my career over the years, it all starts with the business culture, the team, your employees that carries on to customers, suppliers, distributors, complementary businesses.

And you're a complimentary business to those existing businesses because you're a separate, independent you don't work for them, you work for yourself. But that's a complimentary because you're providing a service.

And so you have to do things to build those relationships and turn them into, as you just said with Carol, into a super fan. Because if you weren't, like you said earlier, they'd all leave because someone else is offering it for five bucks less. Right. They're gone.

Charles Read: 00:19:49

Years ago, I was in the footwear important, we sold to Walmart and they'll cut your throat for a nickel. They don't care. That's the way they operate. And that's fine. That's not the way I operate.

And one of our maxims in our business is go the extra mile for your clients because there's never a traffic jam on the extra mile. Your competitors won't.

Freddy D: 00:20:10

Right.

Charles Read: 00:20:10

So if you go that extra mile for your clients, you'll build that loyalty. And yeah, it takes a little time, takes a little money, sometimes takes patience.

You've got to contact your clients, you got to talk to them, you got to be nice to them. But in the end, the payback for going the extra mile is just incredible.

Freddy D: 00:20:28

Yeah.

It's one of my chapters in my book, creating business super fans is the unexpected extra I talk about, which is doing something that the customer or the employee or the partner or the supplier doesn't expect. But you do something and all of a sudden they're taken back. People will crawl through broken glass for appreciation and recognition. Yep.

So by you doing that extra above and beyond, as you just described to your customer, that's the game changer right there. Sometimes the little things are the big things.

Charles Read: 00:21:02

Yeah.

Freddy D: 00:21:03

And sometimes those little things don't cost you money. Except for reaching out to a customer and saying, hey, Charles, Happy birthday.

Charles Read: 00:21:10

Absolutely. Remembering their kids names, sending flowers, showing up at funerals. These kinds of things they don't expect.

Freddy D: 00:21:19

Right.

Charles Read: 00:21:19

And in many cases, it's free. Dr. George Washington Crane was a columnist for many years. My parents sent it to us as children, wherever we were in the world for many years.

And one of the things he would say is to understand people. If you will imagine, tattooed across their chest are the words, I am important. You treat them that way, they'll respond incredibly.

You treat everybody as if they are an important person. And they are. They are compliant, they're a revenue source, they are important.

And if you treat them like they're important, they'll respond incredibly to you.

Freddy D: 00:21:54

It's the same thing. It's an employee, they're a revenue source.

You can't look at an employee as an expense, you really need to look at them as a revenue source and you need to treat that as a revenue source. And if you have that mindset, then you're going to treat them completely differently than the mindset that costed me money.

And there's people that have that mindset and then they're wondering why their businesses can't scale and they've got a revolving door.

Charles Read: 00:22:20

We don't have turnover. Michael is the first loss we've had in seven or eight years that we've had an employee terminate.

You got a, got a wonderful opportunity because he did such good work for us. He noticed more power to them. Absolutely. I never hold that against an employee. If they get a better opportunity, they think for themselves.

Family, congratulations. Take it, run with it. If it doesn't work out, call me back. I've taken people back because they're good people.

And if it doesn't work out, give me a call. Are you? Spot's open. Hey, we'd love to have you back.

Freddy D: 00:22:51

It's all about the relationship and bidirectional. It's got to be bidirectional relationship because at the same time the employee has got to respect and do their contribution as well.

Because it takes two.

e do in especially submitting: 1099

Charles Read: 00:23:23

Well, the: 1099

There's five areas where people make really serious mistakes and causes most of the penalties in the employment tax area. The first is pure arithmetic. That's probably the largest source of penalties is arithmetic errors on the forms. Don't do it by hand. Use a computer.

God, even if you're going to do it yourself, use some cheap off the shelf payroll system. It won't do much, but at least it'll end and subtract correctly.

The next thing is you've got to know what you need to file what forms with the federal, with the state and with the locals. In many cases, if you're one second late, in some cases there's a 10% penalty. It's ridiculous. It's designed to force you to do it.

What do you have to deposit? What do you have to withhold and deposit to the government, federal, state and local? You deposit one second late.

There may be a 5% penalty on that deposit. If you file a form a day late with the state, maybe $100 penalty just because it got there a day late.

So you have to understand what you need to file, when you need to file it, what you need to deposit, and when you need to deposit it. If you do those five things correctly, you've eliminated about 95% of the penalties. Now the IRS will penalize you.

40% of all small businesses get penalized every year, and a lot of them are in error. We get silly things all the time from the service where they've just screwed up.

ome of which goes back to the: 1960

They work at it. When you're dealing with a penalty with the irs, it's appeal, appeal, appeal, appeal, appeal, and keep on doing it until somebody says, okay.

There's numerous levels you can go to and ways to do this.

The first time you get a penalty and you send a letter saying, hey, you made a mistake, there's no penalty due, you're going to get a form letter back saying, you fool it. They don't care. You're just going to get form letter. The second time, they might.

It's only on the third time, when you get to an appeals level, that somebody actually looks at what's going on. So if you accept the first rejection, you might as well not even start because the first time is always going to be rejected. Absolutely always.

Every time, they're not even going to look at it. So you've got to appeal, appeal, appeal, appeal. Now we got several in while, you know, $7, we just paid it for the client and just went on.

It wasn't worth us writing the letter. And the second letter in the third letter.

Freddy D: 00:26:07

For that kind of money, Right?

Charles Read: 00:26:08

For that kind of money. Once it gets to $100 or more than we start to do things. But if you're a small business, you will.

If you weren't penalized last year or the year before, you'll probably get penalized this year. And very possibly there. One of the numbers I use is 19. Before COVID the IRS issued $13 billion in employment tax penalties somewhere on the order.

Half of those got abated because they were in error. So if you get a penalty, there's a real good chance of getting out abated.

Freddy D: 00:26:37

So the takeaway out of that would be to make sure you're up to speed, what you need to file and when you need to file it.

Charles Read: 00:26:44

If you don't know, get with somebody that does get with a payroll company, get with a local cpa, talk to them, make sure you understand all your the requirements you have. And the requirements vary from place to place. Ohio, Pennsylvania have all kinds of local organizations.

Philadelphia, you have to pay school tax based on payroll. City of Aurora, Colorado, Indianapolis, Kansas City, all these places have local taxes.

There are about 15,000 taxing authorities that tax based on payroll. You've got to understand what's going on.

Freddy D: 00:27:17

I didn't even realize that it's pretty wild. I've never really had to pay payroll because it's been me, myself and I.

But when you bring that up and think about it, all those different departments and schools and everything else that you get involved with, you really got to have a handle on what's going on.

Charles Read: 00:27:34

Yeah.

I mean, when professional sports teams go play in New York, there's a tax on the portion of their contract for that game, that three hour football game in New York, the players pay a payroll tax. Football team does for the employees in that state.

Freddy D: 00:27:49

Didn't even realize that. That's crazy.

Charles Read: 00:27:51

That came in a few years ago. New York brought it in and just said, hey, you're going to play in this state. You got money now. A lot of states do it.

Governments raise revenue and 75% of the federal revenue comes through payroll. When you look at a $6 trillion budget for the government, 75% of that comes through payroll. So when they want to change revenue, they change payroll.

Freddy D: 00:28:14

Right. That makes sense. Well, as we come close to the end here, Charles, how can people find you?

Charles Read: 00:28:20

-: 0000

I refer to it as 30 years of wisdom distilled down to 95,000 words. If they would like a copy of it, it's available at thepayrollbook.com if they will enter the discount code podcast, we will ship them free of charge.

No shipping, no handling, no nothing. A copy of the book well, that's very generous.

After they've read what they need to read and they're still confused by phone numbers in the book, we'll make sure.

Freddy D: 00:29:03

That'S in the show notes for our listeners. So appreciate that, Charles. Thank you, Charles. It's been a great conversation, great insight. We could talk on this for quite a while.

And you're definitely a wealth of knowledge when it comes to that information regarding taxes, payroll and the whole gamut of government funding. Thank you so much for your time today and being a guest on a business superfan podcast.

Charles Read: 00:29:28

It's been my pleasure. Thank you.