There are many benefits to outsourcing a business’ payroll and related tax duties to a third-party payroll service. Outsourcing can help ensure that filing deadlines are met and all tax deposit requirements are satisfied. It can streamline your business operations, reduce your overhead, and generally remove one more burdensome task from your management’s plate.
Certainly, having a third-party payroll service administer your payroll and employment taxes and report and deposit those taxes with federal and state authorities can reduce your workload. Remember, however, that employers outsourcing some or all of their payroll tax duties remain responsible for meeting all reporting deadlines and paying all taxes and penalties owed.
A Case in Point
Pediatric Affiliates (PA), a professional corporation, hired a small third-party payroll service to handle PA’s payroll administration and tax needs. However, the founder of the payroll service embezzled the tax payments PA and other firms had transferred to the service and filed tax forms with the IRS that understated the tax liability. Eventually, the IRS discovered the underpayments.
When the IRS sent PA tax deficiency notices, PA argued that it was not liable for past-due payroll taxes or any interest because the founder of the payroll service had embezzled the tax payments PA had made to the service. However, a federal court found that PA remained liable for the payroll taxes and interest. PA’s reliance on the payroll service and the service’s failure to pay the taxes did not amount to "reasonable cause" for failure to pay the taxes.
If you outsource your payroll tax responsibilities, you need to know that:
· The employer is ultimately liable for the payment of tax liabilities. Even if the employer pays the third-party service an amount to make the deposit, the employer is still on the hook if the service fails to make the payment.
· The employer is responsible for all taxes, penalties, and interest, even if the penalties and interest are the result of a failure to timely pay by the third party.
· The employer (or responsible officers) may also be held personally liable for certain unpaid payroll taxes.
· IRS correspondence is sent to the address of record, so the IRS "strongly suggests" an employer keep its address as the address of record. That way, the employer will be sure to be timely informed of tax matters affecting its business.
· The payroll service should be asked if it has a fiduciary bond that would protect the employer in the event of default.
· Employers should ask the payroll service to enroll in and use the IRS’s free Electronic Federal Tax Payment System (EFTPS) so the employer can confirm payments made on its behalf (by phone or over the Internet).
We Can Help
Many employers outsource their payroll administration and tax duties with excellent results. To protect themselves, however, employers should choose and monitor their payroll services carefully. The failure of a payroll service to properly act on an employer’s behalf will not excuse the employer of liability for payroll taxes, interest, or penalties.
Our CPA firm can provide you an added level of comfort in your business’ outsourcing decision making. Our professional staff can examine your business’ payroll situation and make recommendations concerning whether outsourcing would benefit you and, if so, help you implement an outsourcing solution. If you already outsource, we can help you develop safeguards to ensure that your payroll tax obligations are being met.
For more information about how we can help you evaluate payroll outsourcing, please contact us.