Compliance Partner General Do You Outsource...
Do You Outsource Payroll? Take Steps To Minimize Your Risks
by Michelle Higgins

Payroll service providers are good at taking a time-consuming task (like payroll) off employers’ plates. Employers, however, should be aware of the risks involved and how to minimize them.

Pros and cons

Many employers outsource their payroll and related tax duties to third parties. This streamlines operations, as third parties collect and deposit payroll taxes on the employer’s behalf in a timely manner and file required payroll tax returns with state and federal authorities.

Most payroll businesses provide quality service. Unfortunately, there are some that do not have their clients’ best interests at heart.

Choosing the right provider can save time and resources. Choosing the wrong one can land a company in hot water with the Internal Revenue Service (IRS).

Like employers who handle their own payroll duties, employers who outsource this function are in most instances still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee shares of Social Security and Medicare taxes. Even if the employer forwards tax amounts to the third party to make the required deposits or payments, the employer is still responsible for making sure the payments are made.

Each year, some third party providers fail to remit payroll taxes entrusted to them. Instead, they abruptly close their doors for business, hitting employers hard.

How to mitigate risks

One third-party arrangement that can reduce risks is the use of a certified professional employer organization (CPEO). In most circumstances, the CPEO is solely liable for paying the customer’s employment taxes, filing returns, and making deposits and payments for the taxes reported with regard to wages and other compensation paid to employees.

Other third parties, such as payroll service providers (PSP) and reporting agents (RA) may also be right for many employers. A reporting agent is a PSP that has informed the IRS of its relationship with its client. A reporting agent is required to deposit its client’s taxes via the Electronic Federal Tax Payment System and is authorized to exchange information with IRS on behalf of its client.

3 tips for employers to protect themselves from unscrupulous third parties

Enroll in the Electronic Federal Tax Payment System (EFTPS).

By enrolling in this system employers can make sure tax deposits are being made. The PSP or Reporting Agent use this system to make tax deposits.
Available free from the Treasury Department, the EFTPS gives employers safe and easy online access to their payment history when deposits are made under their Employer Identification Number (EIN), enabling them to monitor whether their payroll provider is properly carrying out its tax deposit responsibilities.

It also gives them the option of making any missed deposits themselves, as well as paying other individual and business taxes electronically, either online or by phone.

Monitor statements from reporting agents.

Reporting agents must adhere to IRS rules. They are required to deposit their clients’ taxes via EFTPS and, with limited exception, electronically file the tax returns.

They are also required to provide clients a written statement reminding the employer that it, not the reporting agent, is ultimately responsible for the timely filing of returns and payment of taxes.

This statement must be provided upon entering into a contract with the employer and at least quarterly after that.

Use the employer’s address on forms.

Don’t list the payroll provider’s address in place of the employer’s address on any IRS forms.

Although it’s allowed, the IRS recommends that an employer continue to use its own address as the address on record with the tax agency. Doing so ensures that the employer will continue to receive bills, notices, and other account-related correspondence from the IRS. It also gives employers a way to monitor the third party and easily spot any improper diversion of funds.

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