Outsourcing payroll duties to third-party service providers can streamline business operations and save on internal employee and software costs, but employers should be aware that employers are ultimately responsible for paying federal tax liabilities, not the payroll service.
In recent years there have been prosecutions of individuals and companies who, acting under the guise of a payroll service provider, have stolen funds intended for payment of employment taxes. It is important that employers who outsource payroll are aware of the following three tips:
1. Employer Responsibility:
The employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though
you forward the tax payments to the third party to make the tax deposits, you, the employer, are the responsible party.
If the third party fails to make the federal tax payments, the IRS may assess penalties and interest. The employer is liable for all taxes, penalties and interest due. The IRS can also hold you personally liable for certain unpaid federal taxes.
2. Correspondence:
If there are any issues with an account, the IRS will send correspondence to the address of record. The IRS strongly suggests you do not change the address of record to that of the payroll service provider. That could limit your ability to stay informed of tax matters involving your business.
3. EFTPS:
Choose a payroll service provider that uses the Electronic Federal Tax Payment System. You can register on the EFTPS system to get your own PIN to verify the payments. Visit www.eftps.gov to create an EFTPS account for your business.
As a small business owner or manager, it’s important to stay in tune with all aspects of your business whether you outsource certain functions or perform them in-house. Mistakes can happen. Be sure to stay on top of any payroll related tax notices, and ensure your payroll provider takes prompt action and follows through to final resolution. Additionally, any payroll IRS or state payroll tax issues need to be documented properly in your files in case you need this documentation again at a later date, should the problem “re-appear”. You can also work with your CPA to help you navigate these payroll issues to ensure they are handled appropriately.