Use Care With Outsourced Payroll or You May Be on the Hook for Penalties and Taxes

Many businesses do not have the expertise to process and prepare payroll for their employees.  And logic would cause one to think that using outsourced payroll would remove the risk of penalties and taxes.  Maybe not.

To reduce exposure to penalties and the complications of proper withholding of taxes  and remitting of taxes many business turn to service bureaus.   Reputable service bureaus can help employers streamline their business operations by collecting and timely depositing payroll taxes on the employer’s behalf and filing required payroll tax returns with state and federal authorities.

Though most service bureaus provide very good service, there are, unfortunately, some who do not have their clients’ best interests at heart. Over the past few months, a number of these individuals and companies around the country have been prosecuted for stealing funds intended for the payment of payroll taxes.

Like employers who handle their own payroll duties, employers who outsource this function are 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’s share of social security and Medicare taxes. And if and the service bureau files or pays late, ultimately you are responsible for any penalties.  This is true even if the employer forwards tax amounts to the service bureau to make the required deposits or payments.

If you use a service bureau to process some or all of your payroll functions, here are some steps you can take to protect the company from unscrupulous service bureaus.

  • Be familiar with your payroll tax due dates. Require timely proof that the bureau has actually performed the requested services.
  • Consider having the company perform some activities itself. For example, you could ask the service bureau to prepare the withholding reports and send them to the company for review. After reviewing the reports, you can make the deposit directly.
  • Investigate the service bureau’s financial condition and credit standing, both initially and on a periodic basis thereafter. How are the company’s funds isolated from financial problems to which the bureau or its other clients may suffer, and what coverage and conditions apply to fiduciary bonds of service bureau employees? This is important because little protection or recourse is available to employers whose service bureau misuses funds intended for payroll tax payments and then goes bankrupt. Having the funds held in trust will also protect the funds from an IRS levy of the service bureau’s bank account.
  • Document clearly in the contract the service bureau’s policy on indemnifying the company for interest and penalties that the service bureau’s errors cause.
  • Make sure your service bureau uses the Electronic Federal Tax Payment System (EFTPS) to make tax deposits. Then, enroll in and use EFTPS to verify the bureau is making the required deposits timely.
  • Use the company’s address (not the service bureau’s) as the address on record with the IRS. Doing so ensures that the company will continue to receive bills, notices and other account-related correspondence from the IRS. It also provides a way to monitor the service bureau and easily spot any improper diversion of funds.
  • Contact the IRS about any bills or notices as soon as possible.  They will not go away without action.

For payrolls processed by Holden Moss CPAs, we always use EFTPS to make tax deposits, because it is safer for the employer.  If you have any questions or need assistance in this or any other matter, please give us a call. We stand ready to help.