Background

There are all kinds of great reasons to hire a 3rd party to handle your payroll.   You don’t have to worry about filing all those forms because the payroll service does it for you.  Also, payroll companies generally have knowledge about how to treat various fringe benefits, out of state employees, and other intricacies.   Furthermore, they’re not that expensive.  Your business turns in your employees’ hours, and one bank draft by the payroll service company includes the wages and all employer payroll taxes as well as their fee for services.    And then the payroll company pays those payroll taxes to the IRS, state, and other taxing authorities.

But what happens if the company fails to pay the taxes and uses your money for something else?  Who’s responsible?  Unfortunately, the answer is you, the employer.  There are more than a handful of court cases and IRS publications that confirm this unfortunate result.   In many cases, the employer may not even know that the taxes aren’t being paid until the deficiencies are significant.

What can you do?

  • As an employer, you have the right to make your own payroll deposits rather than have the payroll service do it for you.  Granted, it’s easier to have the payroll company pay the taxes.  But if you have reason to question their compliance, you might want to consider this, or change payroll companies.
  • Monitor your federal tax account through the EFTPS (electronic federal tax payment system) and verify that federal payments are made as required.
  • Make sure the address of record for payroll is the business address, not the payroll service’s address.  That way if there’s a problem, you’ll receive notification.
  • If your payroll service is a Certified Professional Employer Organization (CPEO), you can relax.  The Tax Increase Prevention Act of 2014 included a provision by which an organization can become a CPEO.  The upshot for you, the employer, is that a CPEO is responsible for unpaid payroll taxes, not the employer.   In January of 2017, the IRS finally issued the procedures and requirements for application and the program is finally operational.  Earlier this month, the IRS issued notices of certification to the first batch of applicants and more are expected in the near future.

Bottom Line

Employers should maintain a level of awareness with respect to their payroll service company.    While you can outsource your payroll tax duties, you can’t outsource your payroll tax responsibilities.

Please let us know if you have questions about this or previous newsletters.

Sincerely,

Zirkle, Long & Associates, LLC