Episode 26: Payroll & Employment Taxes: A Closer Look
Welcome back to “Tackling Tax,” where we’ll bring you the latest on tax policy and strategies—in an easy-to-understand format. Whether you’re looking to learn more about tax bills, global tax implications, or planning insights for your business, you’re in the right place.
Listen every other week for more from our guests, which include everyone from university scholars to industry professionals to the firm’s experienced leaders.
On this episode, we’ll focus on one of the more exciting but underrated areas of tax that touches almost every tax and HR decision a large organization makes: payroll and employment. We welcome Nikos Arhos, who leads our Payroll and Employment Tax Services team.
If you have any questions or need any assistance, please reach out to a professional at Forvis Mazars.
Transcript
DEVIN TENNEY
On this episode, we're focusing on one of the more exciting but underrated and under-discussed areas in tax: payroll and employment tax. We welcome Nikos Arhos, the leader of our Payroll and Employment Tax Services, to break this down and more. From your one stop for tax updates and analysis, I'm Devin. It's Tuesday, May 19, and this is “Tackling Tax.”
Today we're diving into an area that I actually find quite exciting. And it's one that quietly touches almost every tax and HR decision that a large organization makes: payroll and employment taxes. So, I'm joined by my colleague Nikos Arhos, who leads our Payroll and Employment Tax Services practice, or PETS as he calls it, here at Forvis Mazars. Now, Nikos spends his days in the middle of tax, HR, payroll, and technology for large corp's and PE-backed companies and so, I'm really excited to have him here today to talk about it.
So, Nikos, thank you so much for joining.
NIKOS ARHOS
Thanks for having me, Devin. Great to be here.
DEVIN TENNEY
Now before we jump into a series of hot topics, I want to give listeners a sense of how you got here.
NIKOS ARHOS
I spent about 12 years at EY and I led their Chicago-based employment tax practice. It was a great training ground. We had big, complex clients and a lot of freedom to go deep on niche issues.
I remember one engagement where a client had just bought a $60 million aircraft for the C-suite, and we were building the personal use policy and imputation mechanics. We had an actual debate over whether a lavatory seat with a seat belt counted as a passenger seat under the FAA rules, and that actually mattered because it fed directly into the 50% seating capacity exception for personal use imputation. And it turns out it did count, by the way.
DEVIN TENNEY
Really?
NIKOS ARHOS
Only in the world of PETS do you end up researching whether a toilet seat’s a passenger seat.
DEVIN TENNEY
And see, this is why it's one of the more interesting areas, as I said.
NIKOS ARHOS
Yeah, exactly. But by the way, luckily here at the firm, we've got a dedicated aviation team that lives in this space full-time. So, I actually caught your podcast, Devin, with Katie and John in the aviation group. It’s a really great episode. Very interesting stuff. But, I think it also goes to show you that we being payroll, you know, we overlap with all these areas more than people might expect.
And so anyway, after EY I spent a couple of years at a smaller boutique restructuring firm, building out their payroll tax practice from scratch, the focus there was restructuring and some M&A where payroll was a piece no one else was handling. And so, I built that into something functional within that lane. But it was mostly deal-dependent, more reactive, and non-strategic by nature. It was very interesting though, because you see how fragile processes are when companies are under pressure and distress. And so, I learned a lot from that narrow focus.
But now, here at Forvis Mazars, I get to blend all of that; technical law, the operational side, and the technology as you mentioned, and that's what I love about this space. You know, we're not just reading federal, state, and local codes all day. We read it, then we have to actually operationalize it inside real systems with real people and stakeholders and real timelines.
DEVIN TENNEY
Well, as you know, and many of our listeners know, I specialize in comp and ben, but you're even trying, you're starting to convince me to to make a change over to the dark side there with payroll. So, for many of our other listeners, maybe some CFOs, CEOs; if I am a chief HR officer, a CFO at a large organization, I know payroll is big, right? But it can also feel like plumbing. How do you describe why payroll and employment tax deserve real C-suite attention?
NIKOS ARHOS
You know, payroll is really the intersection of individual tax and company tax. It touches every employee, it hits the financials, and it sits right at that joint between HR, tax, legal, IT, you name it. It's the artery that the data runs through. So, if payroll and employment tax function aren't healthy, the rest of the organization feels it.
And I usually also frame it this way; if payroll tax showed up as a brand-new cost line, every CFO would be all over it because it's so huge and it's so complex. But in most organizations it's old, it's fragmented, and it becomes background noise until there's a true crisis. And that's usually when help is solicited.
Now, for large employers, this isn't, you know, about nickel-and-dime issues either. Payroll is one of the largest recurring cash tax streams that you have. It drives employee experience. It drives your relationship with government agencies. And it's one of the few areas where HR, tax, payroll, and IT all own a piece of that same risk.
So, you know, I tend to think of payroll as almost like a data hub. Most of the sensitive things you care about live there; where people are, what they're paid, equity, deferred comp, benefits, all the classifications. Finance pulls from it, legal pulls from it, HR lives it, and IT supports it. So, if that hub is off, the whole organism feels it.
DEVIN TENNEY
I could not agree more. I mean, an organization, from a business standpoint, is really nothing more than a group of individuals working towards a common goal, right? And so, payroll is what is tying really all of that together. At the end of the day, there's probably nothing more foundational than payroll when it comes to that concept. So. absolutely can understand the importance and why this probably should matter to C-suites if they're not already looking into it.
DEVIN TENNEY
But, let's talk about maybe what they should be looking into, what payroll and employment tax really mean. So, let's say you lead payroll and employment tax service and you're a chief HR officer or CFO or even a tax director listening. What does Payroll and Employment Tax Services actually mean? So, where do you and your team plug in here?
NIKOS ARHOS
Well, the simple version is we partner with tax and HR leaders and stakeholders with advisory and compliance support around the payroll function across the entire workforce lifecycle. So, on the front end that can be helping with payroll and HRIS RFPs, thinking about what the platform needs to do from a tax and control standpoint, not just what the glossy feature sheet says.
We also help with federal, state, local account registrations at the start of a business, making sure the footprint matches where the business and the people actually are. And then during the life of the workforce, we’re involved anytime there's complexity or events that occur, right. So, multi-state expansion, global mobility, equity and deferred comp sourcing, exec comp, federal, state, local audits, DOL audits that touch payroll.
A lot of that is actually shared space with your world in the comp and ben area. Things like multi-year equity vesting, deferred comp sourcing, state and local implications, you know, audit defense, all those types of things. So, we handle that.
We also handle worker classification. As companies lean more on contractors, consultants, and global solutions, this is becoming a bigger issue. And this isn't just a W-2 or 1099, you know, in the abstract. It's what's the business model? How are these people actually managed? And what does that mean for tax, for benefits, and for the workforce strategy more broadly.
And then you've got the diagnostic side. So, we do payroll process diagnostics which include things like reviewing the team structure, looking at controls, continuity documentation, how the platform is actually configured.
And we do another thing that I call value diagnostics on more of an annuity basis. And that's where we monitor unemployment rate opportunity, statutory elections like joint accounts, wage duplication, earning and deduction code errors that result in value generation. And often these are findings-based type fee arrangements. So, clients are writing a blank check to you. And many times, frankly, clients have no idea that they're sitting on that cash.
So, anytime there's a major event; M&A, an audit, a payroll or HRIS implementation, a big restructuring, there's almost always a payroll thread that hasn't been fully pulled. And that's where we come in.
DEVIN TENNEY
And again, you know, working in the comp and ben space and having, you know, interacted with payroll fairly frequently even I truly didn't understand kind of the pervasiveness of payroll and employment tax and the kinds of services that you can offer and the value that you can bring. And from what I've heard, it's surprised others in the firm as well.
So, I do want to hone down just a little bit, since there is so much there and talk about some of the hot topics, right? If we're looking across large employers right now, where are you spending most of your time? What should the C-suites really be dialing into? The tax directors reaching out to you for?
NIKOS ARHOS
Right now, it's a heavy mix. So, there's a lot of multi-state remote work cleanup. There's state-paid family medical leave and disability questions and issues and processes that require updates. That's heating up. We're doing classification reviews. We're doing unemployment and severance design. I mean, we're seeing quite a bit of that right now, actually, given the distressed environment in certain sectors. A lot of severance cost reduction work coming through. And a lot of M&A and system implementation work in sectors that are restructuring and reorganizing and acquiring.
DEVIN TENNEY
Okay. Well, you mentioned like, kind of, multi-state and remote work, right? I want to start there. It feels like every client conversation includes that now. Can you dive into that a little bit?
NIKOS ARHOS
Yeah, it does. I mean, post-COVID, a lot of large employers quietly created footprints in more states. And sometimes it was so quiet that they didn't even know they were creating a footprint. Employees moved, business models shifted, and sometimes the systems never caught up. So, you end up with wages taxed in one state while the employee is clearly living and working in another, or having local taxes, for example, missing altogether.
The risk in those instances isn't just the tax exposure; it's also the employee experience and reputational risk. So, if your high-visibility people get dragged into a state exam because of how their wages were reported, that gets attention pretty fast and the stakes are higher today than they've ever been, actually, because information sharing agreements across states, between the federal government and the states and localities, and among agencies too. Combine that with dramatic improvements in examination targeting, auditing, and automation within the auditing at the jurisdiction level and their assessment technology.
So, the potential exposure from even a single exam is dramatically larger than it used to be. And the chance that one exam flowers into parallel exams across multiple agencies—DOL, DOR, local—is very real. Again, one thread pulled can set off a chain reaction here that explodes into multiple cross-jurisdiction, cross-agency examinations. Now, the good news is that you don't have to boil the ocean, right?
You could start with the data on this issue. Where do people actually live and work versus how are they being taxed in payroll. From there, prioritize the handful of states that matter most for your footprint and your risk profile, and then work through a staged sort of remediation plan based on those work/live state footprints and operational footprints, broadly.
The sector and industry that you're in can also actually impact this dramatically. So, in high-travel industries, you know, think technology, financial services, consulting like us, professional services where employees are routinely crossing state lines, the compliance monitoring infrastructure and tracking protocols need to be significantly more robust than in sectors where the workforce is largely stationary. So, the more your people move, the more critical it becomes to capture and feed that travel detail into payroll, because without it, you're almost certainly withholding in the wrong state.
DEVIN TENNEY
So, to move on, in some of our conversations, you have mentioned the economy and unemployment trends. How is that feeding into your work?
NIKOS ARHOS
Yeah. We're watching unemployment data and workforce moves closely because they translate directly into layoffs, RIFs, head count rationalizations, restructuring. So, anytime those are on the table, employment tax is quietly sitting in the background.
On the severance side, there's real value in how you design and deliver those payments. We spend a lot of time on SUB pay programs, Supplemental Unemployment Benefit arrangements, where you can structure severance in a way that can be more efficient for both the company and the impacted employees, if you do it correctly.
On the unemployment side, we conduct diagnostic reviews to identify testable gaps and rating issues, with the ultimate goal of really recovering refunds and generating real savings on the state unemployment tax rate. And so, collectively, I think when we're talking about unemployment, severance, it's not theoretical, it's real cash, real human impact. And it's an area where a little planning upfront can significantly change the outcome.
DEVIN TENNEY
You know, speaking of planning and changing outcomes, M&A, mergers and acquisitions, restructurings, implementations, particularly in my area, planning is absolutely vital, and I would imagine that's probably very similar on your end. From a payroll and employment tax standpoint, what should employers be aware of when it comes to M&A?
NIKOS ARHOS
The pattern I see is that payroll and employment tax is often one line on a very long checklist, and in reality it should be its own work stream. On deals, there's questions like, you know, which entities are actually paying wages, how are SUI accounts being handled? What happens to open assessments and payment histories? How will equity and deferred comp be handled at close? If those aren't answered early, they tend to become post-close surprises.
DEVIN TENNEY
How does AI come into this? Are we looking at any potential where AI might make things a lot easier for employers on the HR side, or for what you guys are doing, you know, with a lot of these different areas that you're assisting with.
NIKOS ARHOS
Yeah, and it depends on the use case, right? So, we're using AI in very practical ways. On implementations, it helps us scan large volumes of legacy and test run payroll data to identify where the new system isn't behaving like the old one should have. Or, where both are wrong, relative to the rules. It surfaces the edge cases that humans typically miss. And then we work with the implementation team on root cause fixes. And what gives us an edge there is that we're building our own specialized agents, purpose-built around employment tax-specific rules and technical considerations. So, it's not just general AI processing data. It actually understands the compliance context in great detail.
On ongoing operations, from that lens, we're building AI-driven health check dashboards. Think of it as a heart monitor for payroll. It watches for unusual patterns and wages, tax codes across multiple years and multiple entities. It flags anomalies and gives the tax and payroll teams early warning. So, the point for leadership I think on this is you don't have to wait for a full-blown exam or a full-blown process review to know if something's off. You can have a lighter touch, continuous diagnostic running in the background.
And I think even just, Devin, zooming out even further, beyond the tools and diagnostics, the longer term question I keep going back to, and one that I think will actually reshape this entire space, is what happens to the payroll tax base itself, assuming AI continues to displace certain labor sectors at scale. About 84% of federal revenue ties back to wages and employment. If that base erodes, the funding mechanism for unemployment insurance, Social Security, all of it faces structural stress that no one in the current policy debate is addressing from a tax administration standpoint.
DEVIN TENNEY
84%. I didn't realize that.
NIKOS ARHOS
Yeah, yeah, economists are designing the benefits side of this, right? So, nobody's designing the collection mechanism. And that's a conversation I think that employment tax practitioners need to start owning.
DEVIN TENNEY
All right. So, to close I want three questions. For any of our listeners, what are three questions that they should be thinking about, talking with their payroll team in this area to know, hey, this might be an indication that I should be reaching out to Nikos.
NIKOS ARHOS
I'd start with who actually owns the employment tax risk here and how do tax, HR, payroll, and IT stay in sync? And if you get four different answers, that's your first project, right?
Another question, you know, what's our current view of where we're exposed and where there's value in payroll and employment taxes. Is it multi-state? Is it paid family medical leave? Is it disability? Classification? Unemployment? Severance? Depending on the answer to that, that can help drive the support approach.
And then third, when was the last time we did a structured payroll and employment tax health check the same way we do for other functional areas; income, sales tax, other areas, non-tax? If the answer is never or not in recent memory, there's almost always something worth looking at.
DEVIN TENNEY
Well, Nikos, this has been wonderful. I really appreciate you taking your time to join us today. I love the way that you framed payroll as both a risk area, but also as a value lever, particularly for large employers. So, thank you and hopefully we can have you on the show here again sometime soon.
NIKOS ARHOS
That'd be great. Thanks, Devin.
DEVIN TENNEY
Each episode will bring you what we call a “Focused FORsight of the Week,” an article or webinar that might be of interest to you. This week's Focused FORsight is actually one of my favorite publications and is put out by our firm. It's called “From the Hill” and it comes out every Tuesday. It highlights the top tax news, whether it be from The Hill, the IRS updates, court cases, or anything else from around the nation. You can sign up for “From the Hill” on our website.
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