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An IRS audit found a problem with Rock Hill’s rec department. Could others follow?

Rock Hill’s Parks and Recreation Department won a photo contest with BMX athletes racing at the city’s BMX Supercross track and were featured on the cover of National Recreation and Parks Association magazine in July 2017. The city recently underwent an Internal Revenue Service audit, which found problems with the way the city paid some recreation workers.
Rock Hill’s Parks and Recreation Department won a photo contest with BMX athletes racing at the city’s BMX Supercross track and were featured on the cover of National Recreation and Parks Association magazine in July 2017. The city recently underwent an Internal Revenue Service audit, which found problems with the way the city paid some recreation workers. Rock Hill Parks, Recreation and Tourism Department

An Internal Revenue Service audit found problems with the way the city of Rock Hill has paid some recreation workers for decades. City leaders say the changes won’t affect programs.

“We don’t see any change to what residents will see,” said Katie Quinn, city spokesperson. “It’s just a change to our business practice. People should still expect the same level of service.”

The city last spring received a letter from the IRS stating an agent was coming for a general audit in May. Drew Cooper, financial compliance manager for the city, has been in Rock Hill three decades and said the audit was the first in many years.

“We did not know the nature of the audit ahead of time,” Cooper said.

The agent was interested, Cooper said, in “classification issues” of employee versus independent contractors. The agent had records of some employees filing W-2 forms, others filing 1099s and still others filing both. There were “a few instances,” Cooper said, of city employees also working with the recreation department as an official or program leader. Filing separate forms for those separate activities drew attention.

“It just hits something on the radar screen,” Cooper said.

According to the IRS, the distinction between employee and independent contractor isn’t always easy to determine but is an important distinction. Employees have their income tax, portion of Social Security and Medicare taxes withheld. The employer is responsible for paying Social Security, Medicare and unemployment taxes on wages. Employers must provide a W-2 form.

Independent contractors receive a 1099 form. The contractor is responsible for paying income and self-employment tax. Taxes aren’t withheld from pay.

Determining if someone is considered an employee or independent contractor includes levels of behavioral and financial control the payer has, training, benefits and contracts. An IRS representative said he couldn’t, by law, discuss the Rock Hill case.

The audit reviewed a sampling of returns from 2015. The city was told the contract employee filings for referees, umpires, scorekeepers, and arts and crafts program leaders “should have been treated as employees and paid in that way,” Cooper said. The city had been using the same filing system “for decades,” he said.

The city paid almost $3,000 to make up for what should have been paid in cases where employees weren’t classified correctly, he said.

“It’s just the way we’d always handled these folks,” he said. “We thought that was an exceptionally fair offer.”

The city will have to pay more for an employee than an independent contractor, but hours typically are limited. Other city departments still can use contractors, say if the city contracts road or utility work. But for parks and recreation, the change impacts most everyone who filed as a contractor.

“It’s pretty much across the board,” Cooper said.

The city was given until 2018 to correctly list employees so recreation program workers are now starting to see those changes.

“I think some people have questioned why,” she said. “I think some people might not want to be considered city employees.”

Quinn said she “doesn’t foresee any issue” with recruiting sponsors, coaches and officials for spring sports with registration underway.

The city has about 900 employees. The IRS decision affects about 200 more people.

Rock Hill has the largest recreation program in York County, offering sports, classes and outdoor activities, as well as employeeing seasonal workers. The department estimates it generated more than $40 million in sports tourism last year with tournaments, leagues and clinics. In the past fiscal year, the rec department had more than 1.4 million users at its regional parks and recreation centers.

Resident Lane Thornhill takes art and yoga classes at city parks, and was concerned when she heard about the IRS looking into the recreation department.

“These park and rec centers provide so many services for the community,” Thornhill said. “It also involves the sports, too, the referees, the coaches.”

Thornhill had concerns about after-school programs, too.

“It sounded pretty devastating, because it’s so widespread,” she said.

It was not so much to get a big penalty from us. It was to get us to get it right.

Drew Cooper, financial compliance manager for the city of Rock Hill

City staff assure the issue isn’t dire.

“It was not so much to get a big penalty from us,” Cooper said of the IRS findings. “It was to get us to get it right.”

Nearby city officials are taking notice. Brown Simpson, who heads Fort Mill’s parks and recreation program, said school districts and municipal recreation programs have fairly standard practices for paying officials. His department heard about Rock Hill’s issue and is reviewing its policies.

“I think we’re doing it correctly now,” Simpson said. “We’re not doing anything illegal. We feel like we’ve been doing things the right way all along.”

Tega Cay City Manager Charlie Funderburk explained how the city pays its referees.

“The city pays its referees at a set rate per game officiated,” he said. “They are generally paid in one lump sum at the conclusion of the season and issued a 1099. They are not under contract, but are treated as independent contractors.”

Tega Cay is hiring more officials for its growing recreation program.

“I know a majority of them are local teenagers, but we do have adults who officiate for us, too,” Funderburk said. “We have over 120 youth sport teams with over 1,600 youth participants this season, so there will be quite a bit of games this spring that need to be officiated.”

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