10 Signs of Employee Embezzlement

There are a number of warning signs of embezzlement. Some general indicators may include:

1.     Missing Documents

2.     Delayed bank deposits

3.     Holes in accounting records

4.     A large drop in profits

5.     A jump in business with one particular customer

6.     Customers complaining about double billing

7.     Repeated duplicate payments

8.     Numerous outstanding checks or bills

9.     Disparity between accounts payable and receivable

10.   Disappearance of petty cash

Other employee warning signs that can indicate trouble:

1.     Goes out of the way to work overtime

2.     Spending more lavishly than salary might indicate

3.     Has the same address as a vendor

Detection of Embezzlement by Your Employees

 business often owners rely on their bookkeepers to take care of financial matters. This is especially so where restaurant owners are chefs in the kitchen, leaving them less time to focus on the administrative aspects of the business. However, the business owner is legally responsible for oversight of all aspects of the business, especially financial matters. The sad news is that much of the problem is caused by family members who are trusted and not subject to any checks and balances in the accounting system.

A periodic review of the business books and records can reveal signs of trouble before they bankrupt your business. There are a number of warning signs of employee or partner embezzlement. Some general indicators may include:

  • Missing Documents
  • Delayed bank deposits
  • Holes in accounting records
  • A large drop in profits
  • A jump in business with one particular customer
  • Customers complaining about double billing
  • Repeated duplicate payments
  • Numerous outstanding checks or bills
  • Disparity between accounts payable and receivable
  • Disappearance of petty cash

Other employee warning signs:

  • The employee goes out of the way to work overtime
  • The employee spending more lavishly than salary might indicate
  • The employee has the same address as a vendor

If you suspect embezzlement, you should consult an accountant to confirm your findings. You may also consult your attorney for your options to address any malfeasance  and your insurance agent to identify any coverage you may have for the losses.

Using SS-8 as a self-audit for employers

There are many government forms that I look at to understand their real use. The SS-4, for example, is a form to allow an individual, company or corporation (or their appointed attorney or representative) to apply for an employment identification number (EIN or Tax ID). The information on the form is used by government officials to go through the EIN program in their system to obtain the EIN. If you have ever called the IRS to get your EIN, you will probably notice that the questions they ask you go along with their system to allow them to file your application. In addition to the EIN, the answers you provide will assist them in classifying your company in the appropriate category for tax and census purposes.

What the SS-4 is to the EIN, the SS-8 form is to the determination of a worker’s status. As discussed in Employee or Independent Contractor? – That is the question, the IRS uses a 20-factor common law test to determine whether or not a worker is an employee. When the status of a worker is in question, the IRS may request the employer/worker to complete an SS-8 to confirm his status as an independent contractor or demonstrate that the worker is in fact an employee.

Some employers use this form as an internal audit to make sure their employers and independent contractors are properly identified and taxed, as well as to identify their responsibility and liability to their different workers.

After requesting basic information (name and information on the employer and worker), the form presents questions formulated around the 20-factor test to help determine the worker’s status as an employee or independent contractor.

Below you will find some of the questions taken from the SS-8 form and how they are used to determine employee or independent contractor status.

PART I, Question 4

Usually, when a worker obtains their job by bidding for the contract, they are independent contractors.

PART I, Question 9

When you are asked to explain why you believe that a worker is an employee or an independent contractor, you should be able to provide a reason that incorporates one of the factors that the IRS deems part of its common law test. Using one or more of the factors will help guide your answer. If you have trouble supporting your claim that your worker is an independent contractor, chances are, they are an employee.

PART II, Question 1

If specific training or detailed instruction was provided to the worker (how, what, and where to work) he is probably an employee.

PART II, Question 6

If the worker’s daily routine is repetitive and determined by the employer, then he is probably an employee.

PART II, Question 10

If assistants/helpers are hired by the employer, then the worker is probably an employee. Independent contractors usually hire their own apprentices/assistants.

PART III, Question 1

If the firm provides a majority or all of the supplies, equipment, materials or other work-related property, then the worker is probably an employee.

PART IV, Question 2

If the worker can be terminated or terminates his employment without liability or penalty (i.e. breach of contract) then he is probably an employee.

When using the SS-8 form to assist with an internal audit, understanding the 20 factors that the IRS uses is necessary in order to understand how the answers indicate whether or not the worker is an employee or not. These factors can be found at Employee or Independent Contractor?– That is the question.

To understand the consequences of misclassifying a worker as an independent contractor, you can also refer to Can my servers and bartenders be independent contractors?

Employee or independent contractor? – That is the question

One of the more difficult concepts to grasp for many employers and those new to the business world is the difference between an employee and an independent contractor. The differences between these roles can greatly affect the taxes of the worker and the liability/responsibility of the employer. For a better understanding of the difference between the two roles, I have outlined the factors that the IRS uses to determine which category a person falls under for tax purposes. This test can be used as a general guideline for employers, employees and independent contractors to ensure that they maintain their roles and understand their responsibilities both on the job and with the IRS.

The IRS has a list of 20 factors that it uses to determine whether or not a worker is an employee under the Tax Code. The three most important factors are:

  1. Instructions: requiring a worker to follow your instructions as they pertain to the work they are doing. This includes where they do the work, when they need to do the work/have it completed, and how to complete the job (either specific instructions or a set schedule of the different stages of work required).*minor instructions such as what hardware to use when installing your kitchen cabinets, is not enough instruction to create an employer-employee relationship*
  2. Training: Requiring work to be done in a specific manner by offering training that teaches the worker how to complete different tasks required by the position usually indicates an employer-employee relationship. Whether these trainings be weekly meetings, shadowing a senior worker or attending a mandatory training before becoming employed, these activities all give the employer control over how the worker should do their job and therefore indicate an employer-employee relationship.
  3. Profit/loss: An employee receives a salary to do the work they were hired to do day in and day out. They are susceptible to being fired, promoted or disciplined based on their job performance. An independent contractor has a financial stake in the work and if their work is not up-to-par, they may not get paid; if they take too long, they may not realize any profits, or even suffer a loss.

I have broken down the factors the IRS uses to differentiate between employee and independent contractor into 3 different categories: Employer responsibility – what the employer should control; Financial responsibility – who pays for what; and Miscellaneous – who makes the decisions that cannot be categorized.

Employer Responsibility

Where the employer is responsible for a majority of the decision making, then an employer-employee relationship is probably set in place. The following decisions, when made by the worker, would create an independent contractor rather than employer-employee relationship:

  1. When, where and how the work is done;
  2. When, how and what training is required;
  3. Hiring, supervising and paying assistants/helpers;
  4. Determining work schedule;
  5. Requiring full-time work (40-hour weeks);
  6. Determining order/sequence of work;
  7. Deciding when to terminate work; and/or
  8. Requiring the worker to work at the office/company premises when work can be done elsewhere (from home or a satellite location).

Financial Responsibility

While many employees pay for a lot of their employment expenses (gas, brief-case, toolbox etc.), there are certain expenses and financial decisions that, when left to an employer, create a different relationship than when they are the decisions of the worker. The following decisions/responsibilities, when made by the employer, create more of an employer-employee relationship:

  1. Pay schedules determined by hourly, weekly or monthly pay-rates. (commission payments would reflect more of an independent contractor status);
  2. Reimbursement of travel expenses or other business expenses associated with a job paid by the employer;
  3. Providing the required tools, equipment and materials at the job-site for workers to use to complete the job;
  4. Providing, maintaining and paying for a work facility, job site or office for the employee to work in;
  5. Realization and/or distribution of profits;

Miscellaneous

  1. Part of the business: When the work that the workers are employed to do is an inherent part of the business, typically, the workers are considered employees. Their work is directly related to the business, requiring them to do their work in a specific manner, repeatedly, each day.
  2. Personal services: While workers who are employees are assigned specific tasks and confined to their roles, independent contractors are able to expand their personal services to whichever area they like and offer different services to different jobs.
  3. On-going relationship: Typically, when a worker has a working relationship with one company, they are considered to be an employee. However, there have been many independent contractors who have multiple on-going contracts with the same business that could indicate an employer-employee relationship. One thing that may assist in differentiating the two is that an employee is contracted for their role, while an independent contractor may be contracted for a series of tasks. 
  4. Status reports: While independent contractors typically provide updates on their projected schedules, the IRS looks to see if a worker regularly provides written/oral reports to determine their relationship. Daily, weekly, or monthly reports usually indicate an employer-employee relationship.
  5. Multiple Companies: When a worker has jobs/responsibilities to several different, unrelated companies at the same time, they are likely independent contractors. In addition, the independent contractor can decide who to offer their services to without requiring permission from the employer – they are available to the public.
  6. Ability to discharge workers: When there is an employer-employee relationship, the employer has the ability to discharge the employee at any point in time. In contract, an independent contractor usually works under a contract and cannot be discharged without liability to the employer if the discharge is not permitted under the contract.

While this list can seem rather intimidating, it is essentially what the SS-8 form found on the IRS website reflects. The application to determine “employee work status for purposes of federal employment taxes and income tax withholding” is used by many employers as a self-audit to make sure they are in fact acting as employers.

It is also important to understand that a worker need not have all the factors in their favor to be considered an employee, but a majority in one direction is best in order to qualify one way or another under the tax code.

Whatever category you fall under, it is important to understand why you are classified under that role. Knowing your responsibilities and the liability that accompanies your employment is crucial to ensuring that you not only do your job to the best of your ability, but that you understand the results of your actions, both good and bad.