The benefits of paying the Prevailing Wage Fringe Benefit portion to bona-fide plan is often misunderstood by employers and employees alike.
Prevailing wage jobs, those jobs that are subject to the Davis-Bacon Act and/or State Prevailing Wage Laws, require that all laborers and mechanics {including tradesmen such as carpenters, equipment operators, painters, pipefitters, plumbers, etc.) who perform work on the jobsite are to be paid a set base rate of pay PLUS an hourly fringe benefit rate.
Union contractors automatically pay the total hourly fringe benefit rate to the union hall on behalf of the employee, usually splitting the full hourly rate into specific “funds” – Health & Welfare, Pension, Vacation, etc. When this happens the Union contractor doesn’t pay payroll taxes, worker’s compensation, or general liability insurance on this amount.
Non-Union contractors, on the other hand, can pay the fringe benefit rate to the employee in addition to the stated base rate of pay OR they can pay it into a bona-fide plan on behalf of the employee.
We’ll look at the differences and discuss the benefits to both employees and employers.
In the following examples we’ll be working with a base rate of $41.51, fringe rate of $18.72, a Worker’s Comp experience rate of $10.70 per hundred dollars in wages, and a General Liability Insurance Experience rate of $0.636 per hundred dollars in wages and a standard 40 hour work week.
When the fringes are paid in cash – included in the employees base rate of pay
As an employee you are paid $60.23 per hour ($41.51 + 18.72) x 40 hours = $2,409.20 gross with a net of $1,512.38. As an employee you are paying $896.82 in taxes – see sample paycheck below:
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As an employer you pay $560.99 in payroll taxes, worker’s comp and general liability insurance in addition to the $2,409.20 gross wages for a total of $2,970.19 to have the employee on the jobsite for 40 hours.
When the fringes are paid to a bona-fide plan on behalf of the employee
As an employee you are paid $41.51 per hour x 40 hours = $1,660.40 gross with a net of $1,101.47 PLUS $748.80 is contributed to the bona-fide plan on your behalf for a total of $1,850.27. As an employee you are paying $558.93 in taxes {in reality that is a savings of $337.89 in taxes) – see sample paycheck below:
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As an employer you pay $1,135.96 in bona-fide plan contributions, payroll taxes, worker’s comp and general liability insurance in addition to the $1660.40 in gross wages for a total of $2,795.86 to have the employee on the jobsite for 40 hours – that’s a savings of $174.33.
Many employers and employees are rightfully cautious about the cost of setting up a bona-fide plan. Many times setting up a traditional 401(k) or 403(b) plan is costly (one customer recently told me that it would cost them $5,000.00 to initially set up the plan) and then the employees must wait until legal retirement age before being able to start withdrawing the money.
The Supplemental Unemployment Benefit Plan (SUB Plan) offered by Prevailing Wage Contractors Association (PWCA) has a start up cost to the employer of $200.00; and provides employees access to the money when they need it most – when they are not working or have missed some time. The SUB Plan can be used to pay an employee when he has a short work period; which is defined as working less than 40 hour in a week or less than 173 hours in a month. Short work periods can be caused by layoffs, bad weather, illness, lack of work, equipment down time or any number of reasons.
For additional information about the SUB Plan offered by PWCA, visit their website – or contact Nancy Smyth.
QuickBooks Payroll, when properly set up, is capable of tracking and including the cost of your General Liability Insurance; as well as many of the other things that costly construction software does automatically – with a little more effort on your part and without the big price tag.
Tracking General Liability Insurance, when it is based on gross payroll, and getting those costs into Job Costing Reports is vital for many businesses, especially the construction industry.
NOTE: The best time to implement this procedure is when your General Liability Insurance Policy period starts.
The following instructions will allow you to track your General Liability Insurance costs when it is based on gross payroll and get those costs into your job costing reports without making complex journal entries. It will also help you be aware of how much your premium payment will be so that you aren’t in for an unwelcome surprise when the bill comes in or your policy is audited.
QuickBooks Setup for accruing the cost of General Liability Insurance
Example:
In our example general liability insurance is calculated at $6.36 per $1,000.00 in wages for field workers – realize that each type of work that you perform could very well have a different experience rate (just like Worker’s Comp).
Step 1:
Come up with a rate per $100 in wages so this can be calculated for each employee with each paycheck, if paychecks are usually less than $1,000.00 per employee per week.
- $1,000.00 divided by 10 = $100.00
- $6.36 divided by 10 = $0.636
If your policy has different experience rates for different work or employee classifications you’ll want to determine this cost for each different rate.
Step 2:
Create an Other Current Liability Account on your Chart of Accounts to track your Accrued General Liability Insurance. From the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left –> click New –> select the radio button next to Other Account Types and choose Other Current Liability from the drop down menu.
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Click the Continue button and add the details for the account.
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Click Save & Close.
Step 3:
Create the Cost of Good Sold and/or Overhead accounts to track the expense to the company. A Cost of Goods Sold account would be used for field workers and an Expense Account for Overhead and Office workers. From the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left –> click New –> select the radio button next to Other Account Types and choose Cost of Goods Sold from the drop down menu – OR – click the radio button next to Expense.
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Click Save & Close.
Step 4:
Create Company Contribution Payroll Items to track the costs while running payroll. From the Lists menu –> choose Payroll Item List –> click the Payroll Item button at the lower left –> choose New –> select Custom Setup –> click Next –> click Company Contribution –> click Next –> type in the name for this item and select the Track Expenses by Job option –> click Next –> choose your General Liability Insurance Carrier –> from the Liability Account drop down select the account you created in Step 2 –> from the Expense account drop down select the account you created in Step 3.
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Click Next –> Tax tracking type should be set to None –> click Next –> Taxes window should have no tax types checked –> click Next –> Calculate based on quantity window select the radio button to Calculate this item based on quantity –> click Next –> Default rate and limit window, enter the amount that you calculated in Step 1 and make sure that the This is an annual limit option is NOT checked. Click Finish.
Step 5:
Add the company contribution item(s) to Employee Defaults so all new employees who are hired will automatically have this item automatically included in their employee records.
From the Edit menu –> choose Preferences –> select Payroll & Employees –> click on the Company Preferences tab –> click the Employee Defaults button –> click into the Item Name column of the Additions, Deductions and Company Contribution section and select the item(s) you created in Step 4.
Step 6:
Add the company contribution item(s) to existing Employee Records in order to calculate your accrued liability when processing payroll.
From the Employee Center, edit each employee record going to the Payroll & Compensation tab –> click into the Item Name column of the Additions, Deductions and Company Contribution section and select the item(s) you created in Step 4.
Calculating General Liability Insurance Costs When Running Payroll
When running payroll you’ll want to open (view) the detail of each employees paycheck –> determine gross payroll ($280.00 + $1,120.00 = $1,400.00 – per the sample paycheck below) –> take total gross and divide it by 100 (1,400.00 divided by 100 = 14) –> enter 14 in the Quantity column next to the company contribution item and click Enter. QuickBooks will then calculate the General Liability Insurance for this employee and display that amount in the Company Summary section.
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By implementing and following this procedure your General Liability Insurance will be included in your Payroll Summary Reports, Profit & Loss, and Profit & Loss by Job Reports. Additionally, your accrued liability will be displayed on Balance Sheet Reports and can be viewed at any time simply by viewing your Chart of Accounts List.
One final note; when it’s time to pay your General Liability Insurance policy premium you will cut the check using the payroll Pay Liabilities function – DO NOT USE the Write Checks feature.
Each Friday, here on the QuickBooks for Contractors blog, we will be offering a free QuickBooks related eBook, offering tips, tricks, and training – so stayed tuned, visit often or sign up to have our posts delivered daily via email.
This week’s eBook provides information and tips for setting up a system to track Subcontractors Workers Compensation and General Liability Insurance expiration dates.
When a contractor works on a construction project and he/she hires subcontractors; one of the things that he is required to keep on file is a CURRENT copy of each subcontractors Worker’s Compensation Insurance Policy and a copy of their General Liability Insurance.
Keeping track of expiration dates and making sure that you always have a copy of the current policy on hand, can be a daunting task.
A reader wrote to ask the following question:
I have a vendor (subcontractor) whose general liability insurance expired. In QuickBooks I was able to produce a check for them. How do I QuickBooks to notify me that their insurance has expired?
Answer:
Unlike some of the more costly construction specific software programs out there, QuickBooks wasn’t designed to prevent us from generating a check to a Vendor/Subcontractor whose General Liability or Worker’s Compensation insurance has expired.
The QuickBooks Premier (or Enterprise) Contractor edition does have a “section” in the Additional Info tab of the Vendor Record where you can enter an expiration date for both Worker’s Comp and General Liability insurance – and if you enter dates in these fields you will get a warning when using a vendor whose insurance has expired – however, it will not prevent you from writing the check, entering the bill, or creating a purchase order.
In other versions of QuickBooks Pro, Premier, or Enterprise; you can create “Custom Fields” to use in the Vendor record – but they will not produce even a warning.
There are several things that you can do – but none of them will automatically “warn” you before the Subcontractors insurance does expire OR prevent you from writing them a check after it has expired.
One thing that you can do is have your Vendors/Subcontractors request a Certificate of Insurance from their insurance company, listing you as a Certificate Holder. That way you receive a Certificate showing the policy period AND you would also be notified if the coverage was canceled or if it expired.
Even having access to this information directly from the Vendors insurance agent isn’t enough if you don’t have a policy and/or procedure in place for tracking this.
While QuickBooks won’t do anything automatically for you, it will provide you with tools (date tracking, report generation, letter creation, Reminders, and To Do Notes) to implement a good system for tracking this information.
Request our FREE eBook – “QuickBooks Tips & Techniques – Setting Up & Tracking Subcontractors Worker’s Comp Insurance”.
This FREE 13-page eBook will provide you with complete instructions for setting up and maintaining a system for tracking expiration dates of Subcontractors Worker’s Comp AND General Liability Insurance.
