Understand your Outsourced Payroll Responsibilities
Let’s face it. Payroll compliance is challenging, complex and time-consuming with the different federal, state and local rules, withholding tables, return filing dates, and tax withholding remittance dates. It’s hard enough to run a business without the headaches of processing payroll. If the payroll withholdings and remittances are not done properly, the employer may find itself subject to substantial penalties.
Accordingly, many employers outsource their payroll and related tax duties to third-party payroll service providers to help assure that the filing deadlines and deposit requirements are timely met. There are numerous national and local payroll processing companies. When choosing a payroll service provider, the employer needs to perform its due diligence. Unfortunately, some business owners view payroll compliance as a necessary evil and hire the lowest-cost payroll processing company without fully understanding the risks involved in such an approach.
Employers need to understand that they are ultimately responsible for the payment of income tax withheld and both the employer and employee portions of social security and Medicare taxes. What this means is that if your payroll processing company absconds with your company’s withheld payroll taxes, you are responsible for the payment of these undeposited payroll taxes, including interest and penalties. The Allentown PA Morning Call newspaper reported in April 2017 that a Bethlehem payroll processing company (NEPA Payroll Services) stole $5.3 million in wage taxes from clients of NEPA. The businesses that were the victims of NEPA were found ultimately responsible for the payment of these taxes. How many of these businesses were forced into bankruptcy?
But it gets worse! The IRS will not only assess the business for the unpaid taxes, but also make personal assessments against all responsible persons (Code Sec. 6672(a)). These responsible persons can be found liable even if they had no knowledge that the IRS was not being paid. So if you are found to be a responsible person, the IRS can pursue you personally for payroll taxes if the company fails to pay.
TAX SAVINGS ALERT: If there are issues with an employer’s payroll account, the IRS will send correspondence to the employer’s address of record. The IRS recommends that employers not change their record of address to that of the payroll service provider as it may limit the employer’s ability to be notified of tax matters regarding their business. Whenever the IRS learns of a change of address, it sends a notification to the last known address of record asking for confirmation of the address change. Upon receipt of such notice from the IRS, employers need to work closely with their tax professional to ensure that improper changes to the address of record are not being made.
TAX SAVINGS ALERT: Depending on the facts and circumstances, and the type of third-party arrangement (Payroll Service Provider, Reporting Agent, Section 3504 Agent, Certified Professional Employer Organization), an employer who uses a third party to perform federal employment tax functions on its behalf may remain solely liable for federal employment taxes, may become jointly and severally liable for such taxes or may be relieved of liability for such taxes. The IRS has provided a Third Party Arrange Chart that business owners may find useful in deciding the best payroll service provider choice for their business.
TAX SAVINGS ALERT: The IRS recommends that employers confirm with the IRS that its payroll taxes are being remitted to the IRS by the payroll service provider. The IRS recommends that business owners enroll in the Electronic Federal Tax Payment System (EFTPS) which will enable them to confirm that payroll tax deposits are being made on their behalf. Registration is done online and the IRS within 7 days will send the business owner a pin and instructions on how to create a password. Taxpayers can learn more about the EFTPS system by reading IRS Pub. 966.
TAX SAVINGS ALERT: If you suspect your payroll service provider of improper or fraudulent activities involving the deposit of your federal taxes or the filing of your returns, you can file a complaint using Form 14157 Complaint: Tax Return Preparer (PDF). The IRS has streamlined the process to file Form 14157. You can mail the form, or fax it to 1-855-889-7957. Once received, the PSP-identified complaints will receive expedited handling and investigation.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.