The Trump Effect: Small Business and Regulation with Stephen Dombroski
Learn about potential policies affecting taxes for small businesses, including changes to current tax benefits, credits, influence on state and local taxes, keeping business activity in the U.S., and fraud reduction efforts.
Learn more about the Trump Effect on small businesses with:
Gene Marks: Hey everybody. Welcome. My name is Gene Marks. I'm a frequent writer for the Washington Post. I write every day for the Washington Post and a bunch of other places as well. I run a small business outside of Philadelphia. We're a technology and financial management consulting firm. So we've been around for about 20 years. And today I'm honored to be here with Steve Dombroski. Steve is, let's see if I get this title right, the senior payroll tax compliance manager.
Stephen Dombroski: You got it.
GM: So what does that mean?
SD: Well primarily what I do for the company is I have a whole team of individuals that manage all of our relationships with the federal, state, and local taxing authorities. So they are constantly monitoring changes within the legislative and regulatory environment for impacts to our business to ensure that we can have all of our systems up to date so that we're being accurate with the payrolls that we produce for our clients.
GM: So you were telling me earlier, you have been at Paychex for 21 years.
SD: 21 years, yeah.
GM: Where were you in a prior life?
SD: So actually, after I graduated college I started out in management in the retail industry, and then Paychex lured me in. And I've been here ever since. It's been a great company.
GM: That's amazing. So if you're in management or retail, did you come to this job with that much knowledge of payroll tax issues, state regulatory?
SD: No, not at all. Just kind of learned it on the go. Really all been organically, as I've grown up through the organization.
GM: How do you learn that stuff? Does Paychex provide the education for you, or is it self-taught?
SD: Certainly, I think there is some training, but a lot of it is self-taught. It's about getting your feet wet, diving in and just really learning the environment as we begin to learn the Paychex products and services. It's really gaining an understanding of what's going to impact not only our systems but our clients. And then also working with our product partners to say, hey we see some potential changes in the legislative or regulatory environment that might be impactful that maybe we'd want to consider offering services to our client base.
GM: Got it. How many people in your group?
SD: Right now, I've got about 23 individuals that report through me.
GM: That's great. So are you focusing on just federal or state or local, or all of the above?
SD: All of the above. Certainly, federal is key for us with our significant client base. Pretty much almost all of our clients participate in using our Tax Pay product. So as a result of that, we have a responsibility of depositing their funds and filing their payroll taxes with the IRS and also their W-2s with the Social Security Administration. But then that trickles down, because of that widespread client base, we do support clients in all 50 states as well as a lot within local tax jurisdictions. I'm sure you're familiar with Pennsylvania local taxes.
GM: And Philadelphia, which is insane.
SD: The complexities there, as well as Ohio. And there's other pockets across the country that also require depositing of local payroll taxes as well. So we support those for the clients.
GM: How do you keep up on that stuff? I mean Steve, it’s a huge job to do. But what do you do?
SD: Well, I'll tell you, and I know it sounds a little cliché, but that whole concept of it takes a village. Really we have a whole team of analysts that are aligned specifically against supporting all of these agencies on a daily basis. So they spend their days, day in and day out scrubbing tons of different sources for information and doing the monitoring to ensure that we keep up to date with that. And then I think those relationships with the agencies that I originally mentioned, those are key in helping us obtain early warnings from the agencies about changes that are coming with their tax systems, maybe to their forms, to their electronic filing systems, so that we as a major payroll service provider can be up to date and ready to go for those clients right out of the gate.
GM: And it's just anything that impacts taxes is your job, correct? So you're looking after payroll taxes?
SD: Sure. While we do a lot of working and partnering together within our department, we find that specializing in breaking that down within subject matter areas of expertise is really helpful for us to ensure that we can cover the breadth of information that's out there. It's a huge job really.
GM: So has it in the 847 years you've been working at Paychex, has the job gotten easier or harder? Do you think it's a more complex regulatory environment, or less so?
SD: Yeah. Absolutely more complex. I'd say if I look back on my career with Paychex, so we're 21 years in. And roughly about 19 of that, have all been aligned with support of compliance in some way, shape, or form. I'd say over the past 10 years, we've seen the environment become increasingly more complex, more so than I ever thought. Even just within the downturn that we saw in the economy, how that affected government agencies, their budgets were really tight. So we saw changes from reductions in staffing at the agencies. That became more challenging. And then also with the electronic era nowadays, many agencies have been trying to upgrade their systems to new filing methodologies. That's all new to us. So we're working to look at the legislation, the regulations that have become a lot more complex and working with the agencies, because while the legislators legislate, they just turn that over to the agencies to make the rules.
GM: Somebody's got to execute on that, right?
SD: Got it.
GM: Where do you see your customers making their biggest mistakes when it comes to tax compliance?
SD: I think first and foremost that the big thing is just understanding the requirements they have to comply with, what information they have to report to us, doing so in a timely manner. We oftentimes, especially when we approach the year-end time frame or quarter-end time frames if we have employers that are going to be paying things out like bonuses to their employees. There's a timely way to do that and ensure that we're depositing all the taxes in time for them. I think frequently our field locations will get those phone calls, oh my gosh I forgot to call in payroll, or I forgot to report this employee, or this employee just reported their hours to me. And then there couldn't be a trickle down impact, because if that's not done timely, or they reported information late to us, that has the potential to result in late tax deposits, late filings and potential penalties and interest that they have to pay to the governing authorities.
GM: Right. What are some of the big compliance-related issues broadly? And we can dig down a little bit deeper. But what are some of the big issues that you've been working on that you see coming up?
SD: Yeah. Absolutely. So certainly right now with the new presidential administration, with Trump in the White House and the GOP-controlled Congress, one of the big items now that we're really keeping an eye on is where they're headed with tax reform. There's been a lot of discussion regarding that. We know today that President Trump is particularly favorable to businesses. One of his plans with his tax reform initiatives includes wanting to reduce the corporate income tax rate from 35% down to 15%.
SD: Now the House Republicans—
GM: They want about 20%.
SD: They want 20%, right. So we really don't know where that rate is going to end up. But I think one of the key things there is that regardless of where that rate ends up we're likely going to end up with a significantly reduced rate being proposed.
SD: Now the other interesting point with that, Gene, is that we also anticipate that that's going to benefit pass-through entities, such as limited liability corporations, S corporations. Now those types of setups are frequently favored by small businesses.
GM: Like mine. We have an S corporation.
SD: Sure. Actually just last week, there was legislation that was reintroduced in the Senate that essentially is meant to protect the small businesses from having to pay higher rates than some of the larger corporation. It's to ensure that small businesses themselves will not be paying any more in rates on their businesses than a corporation would be paying.
SD: Now some of the other things that have also been thrown out there as well is that both the President and the House Republicans do favor elimination of the alternative minimum tax. And they do also want to permanently extend the research and development tax credits that exist. So that potential is something that we're keeping an eye on. And then I think another big thing that will really come into play and be very impactful for all businesses, small or large, is there's the thought concept out there of being able to advance the ability for a business to write off their capital expenses in the year that they're actually placed into service, as opposed to what they have to do right now. And that's depreciating that over time. So I think one of the big results of that does have the potential for businesses to begin to make decisions to further invest in those businesses, because of that ability to write those off, which they might not have done otherwise.
GM: So that's the Section 179 deduction, right, for accelerated depreciation. And that is, I know back in 2015 I think they were making that permanent. But they're thinking like you said, maybe expanding it for more businesses to take advantage of. You know what's weird about this Steve, is that you're mentioning these things, so we talked about depreciation, research development tax credit. You've mentioned pass-through rates, reducing corporate – these are all great stuff with tax reform. None of that seems to have anything to do with payroll, right? And yet here, you're the compliance senior payroll tax compliance manager, make sure I got that right, at Paychex, so why are you so involved in that?
SD: Well I think from an overall perspective of the way that Paychex can best service their clients, we certainly have a recognition that outside of the payroll environment, and there are impacts from the payroll tax perspective that we can get to in a minute, but we really think that it's critical for these businesses to understand some of the key things that they will need to keep an eye on. They're busy trying to run their business.
SD: They don't have time every day to be keeping up with what is the Trump administration doing next? What is the House or the Senate proposing next?
GM: And by the way, if I can even interrupt you, for the typical small business owner, if they want to try and read it, god knows what they're going to find online, depending on where they're reading from here, where they're reading from there, left and right, and whatever.
SD: Well absolutely.
GM: They're looking for a resource that can be sort of, just give me the facts.
SD: Yeah, and so I think that's where we're looking at our role of just stepping in to help provide that information to them to get the wheels turning in their head about some of the key things that they should be considering, because that could help them from a tax planning perspective in the year ahead.
GM: What type of things do you think might be impacting pay?
SD: Yeah, sure. So initially with health care reform, when we were looking at the repeal and replace initiative, there were some potential tax implications there. Those were largely centered around Medicare and additional Medicare tax—
GM: Of 3.8% unearned income tax as well.
SD: There was that and then the additional 0.9% on wages above $200,000. So that would be impactful. Where that goes at this point in time, we know the repeal and replace efforts aren't anywhere in the foreseeable future. But when we really hone in on payroll taxes, well, for those business owners that do have employees, there's a couple of things that we're keeping an eye on for them. So first and foremost at that individual income tax level, we absolutely anticipate that both the President and the GOP Congress are going to propose also significant reductions in that individual income tax rate. So we know that today President Trump favors changing the tax bracket methodology from seven tax brackets down to three brackets. So that correlates to a direct impact on employers, because every time that they're calculating their payrolls, there's going to be a change in their federal tax withholding calculation. So they've got to be aware of that, because that's going to be impactful. And then an additional thing that has the potential to be impactful for certain employers that pay higher wages is that, and I'll spare all the details of going into the discussions surrounding the need for Social Security reform, but there is a proposal out there today to actually increase the Social Security taxable wage base. Now from a planning perspective, what employers need to keep in mind that if that were to go through that in fact would mean additional taxes owed by both them as the employer as well as their employees. But again that would only be for wages up to that newly established wage threshold. So we typically see that with higher income earners.
GM: Got it. It's funny that this is all, I'm a customer because there's no way that I would be able to keep up with the stuff, it's ridiculous.
SD: Well I'd say overall, what we're very fortunate with is that, if you think about it like this. A business enlists a company like Paychex to support all that of them. So if that business has been with us, and they're reporting all of their information to us, then we are depositing timely, we are accurately supporting their tax filing. So therefore, from a compliance perspective, they move up on that compliance ladder. Where we do see some challenges, quite frankly, are for those newer clients that come on board. So as--
GM: They're not used to the system. They're not used to the process.
SD: That whole point. But in addition, I think it's frequent that we will uncover during our new client onboarding process, that perhaps they haven't done everything that they needed to do. So I think it's working through bringing them up to compliance. Now from that enforcement perspective with the IRS, again I mentioned we are fortunate just because of our relationship that we've established with them in our ability to speak through some of those difficult scenarios with them.
GM: Got it.
SD: One of the other things I do want to mention when we look at enforcement in the IRS funding, if ultimately Secretary Mnuchin is successful at convincing Trump and his administration surrounding that the benefits of continuing to fund the IRS, then we would quickly anticipate not only buildup of staff, but build up those enforcement efforts, and then in turn what that means to businesses and individual taxpayers is now the IRS has the ability to conduct more audits on them. So certainly we'd encourage all of our businesses out there to keep an eye on that, because it really will be important to be in compliance with all of the business requirements that they have. Because that potential does exist.
GM: Do you see any specific states or any specific regions of the country doing anything that will be impacting compliance on your end from a tax perspective?
SD: Yes. I'd say this is one area that could be particularly complex based on where we go with federal reform. Because, see, what a lot of folks don't have recognition of is that changes in the federal tax code definitely could have a pretty significant trickle-down impact from both a state and local jurisdiction perspective. And that's because a number of states and locals actually link their tax laws directly to the federal tax code.
SD: So when we look at those types of things, say like changes in federal deduction or credit amounts, that can have a direct impact on the state tax structures as well as the state tax revenues that they're collecting. So we're going to see the states have to quickly make decisions based on where the federal reform goes to either conform with the new federal code. Or they may even decide to abandon the federal code altogether and establish their own tax policies wherever they were linked to that federal code.
GM: How about federal funding? There's been proposed cutbacks in spending in DC, and so less money that the federal government is going to be spending. That means less money going to the states for a lot of programs. I guess that money's got to come from somewhere too, right?
SD: Sure. It sure does. So I think that's where, when we look at states making a decision of whether or not they link to that federal code, or even if they do, do they propose increases for that to collect that lost revenue that they're going to have? I think one potential benefit that could be there is when we talk about the fraud reduction and things like unemployment, I think will be a little bit down the road. But hopefully advancements to help detect and deter fraud because we know even at the state level with unemployment funding, that's a challenging environment for them to be able to fund that.
GM: And it's a big issue.
DB: It definitely is.
GM: The takeaway is, it's funny, it's like when we talk about tax reform that it's decreasing our rates and there should be an incentive, whatever. But meanwhile that's fine at the federal level, but it seems like it could come back to snap us a little bit on the state level. So we think we're saving in taxes, but when you start looking at the added tax that might come out locally, maybe we're not saving as much as we think.
SD: Sure, right. I wish we had that crystal ball, and we could really determine what direction this is going to go in. But I think that's where, as a service provider to our clients, it's such a key part of our service offering, that we have a whole team aligned against monitoring this stuff every day. Because what we're talking about today could be wildly different tomorrow, based on the happenings within Washington today.
GM: Steve, thanks very much. It was a great conversation. Really appreciate your time.