What is a VEC Audit?
VEC (Virginia Employment Commission) is the state agency that oversees matters of state unemployment insurance, business registration, and wage and labor data for the state of Virginia. It is essentially the state’s labor department.
Payroll reporting and unemployment insurance are a serious matter for Virginia-based businesses and organizations that are not in-state but plan to expand operations into Virginia. Even if you are just using contractors or casual labor (1099) you need to report all compensation that you paid people to VEC. This includes part-time, seasonal, and project-basis labor whether or not they are your employees.
You may receive what’s known as a VEC audit in the event that your records do not match up with what is in the system, namely if workers file for unemployment and the numbers don’t match. Over 3,700 VEC audits are conducted every year with the state’s auditors conducting periodic reviews of registered employers.
Do I Owe Taxes if VEC Audits My Business?
VEC audits are a separate matter from income taxes in that they only pertain to unemployment insurance and whether you failed to report all paid labor to VEC.
The most common reason for a VEC audit and owing these taxes is if you didn’t pay or underpaid state unemployment insurance. While federal unemployment insurance has a flat rate of 6%, Virginia state unemployment is subject to various percentages based on account history (how long they have been paying wages.) For instance, paying wages across 12 full months of the July 1-June 30 fiscal year will result in a different rate at the calculation period. The rate is determined by dividing the benefits charged against the employer account by the taxable wage amount at fiscal year-end (June 30) of the prior tax year, up to four fiscal years back. This ratio is applied to the unemployment trust fund factors to determine the base tax rate.
Since this calculation is confusing for the majority of small business owners who operate on a calendar year in addition to utilizing seasonal or part-time workers, accidental underpayment of state unemployment insurance is a common issue. If VEC finds that you willfully violated statutes, you may owe penalties in lieu or addition to the missing payroll taxes.
I Am a Non-Employer. Do I Need a VEC Account Number to Avoid a VEC Audit?
You are required to register for a VEC account number if you are liable for federal unemployment insurance (FUTA.) While you would still need to report the usage of contract workers and casual labor to VEC, you don’t need a VEC ID unless you are already paying into FUTA for each employee. Even if you have just one temporary or seasonal employee, so long as you owe FUTA on their wages then you need to get a VEC ID. This also includes household employers, such as if you employ a housekeeper or nanny and they are not self-employed or being hired out to you through an agency. You are required to pay under a different rate and indicate whether you are a household employer.
If you are a non-employer who doesn’t need a VEC ID, you can still end up with a VEC audit just for failing to report all payments made to people.
Rue & Associates values your time as a business owner. Payroll tax reports, wage reports, correct classification of workers, determining which rate you should pay, and knowing the correct statutes to cite can be stressful and time-consuming when you just need to focus on your operations. Our experienced tax professionals can significantly reduce your VEC audit risk by taking on your quarterly payroll tax responsibilities and VEC reporting requirements. We are also happy to answer any questions you may have about labor and unemployment insurance matters.
In the event you are subject to a VEC audit due to miscalculation or failure to file your quarterly returns, Rue & Associates can represent you to the state and negotiate payments and penalties on your behalf in addition to filing any backdated payroll tax returns and other forms that need to be filed. Give us a call today to speak to one of our friendly and professional tax law experts.