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Business Corner

Outsourcing payroll?
Don’t forget your tax responibilities

by Small Business Tax News

The IRS is reminding small businesses that outsourcing their payroll duties can be a sound business practice, but don’t lose sight of your tax responsibilities as an employer.

There are at least eight benefits for small businesses that outsource their payroll functions, according to SurePayroll, a top payroll outsourcing provider. They are: avoiding IRS penalties; reducing costs; alleviating aggravations; offering direct deposit; free up time for more revenue-generating activity; avoiding technology headaches; leveraging outside payroll expertise; and avoiding payroll knowledge from walking out the door.

“By outsourcing to the right company, a small business owner can take advantage of someone else’s expertise, and save time and money. Outsourcing payroll allows you to spend more time on what you do best – running your business,” said SurePayroll President Michael Alter.

The IRS generally agreed. “Many employers outsource some of their payroll and related tax duties to third-party payroll service providers,” the agency said in a recent posting online. “They can help assure filing deadlines and deposit requirements are met and greatly streamline business operations.”

Some of the services they provide are administering payroll and employment taxes on behalf of the employer, where the employer provides the funds initially to the third-party. They also handle reporting, collecting and depositing employment taxes with state and federal authorities.

Be that as it may, employers still need to be cognizant of their tax responsibilities as employers. “The employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though the third-party is making the deposits, the employer is the responsible party,” the IRS warns.

Note that if the third-party fails to make the federal tax payments, the IRS can assess penalties and interest on the employer’s account. “The employer is liable for all taxes, penalties and interest due,” the agency said. “The employer may also be held personally liable for certain unpaid federal taxes.”

Another thing to keep in mind: If there are any issues with an account, the IRS will send correspondence to the employer at the address of record, not that of the payroll outsourcing firm. “The IRS strongly suggests that the employer does not change its address of record to that of the payroll service provider as it may significantly limit the employer’s ability to be informed of tax matters involving their business,” the IRS said.

Also, for the employer’s protection, the agency said employers should ask the payroll service provider if they have a fiduciary bond in place -- something that could protect the employer in the event of default.

The IRS also reminds employers that they should ensure that their service providers are using the Electronic Federal Tax Payment System so the employers can confirm payments have been made on their behalf. The EFTPS maintains a business’s payment history for 16 months and can be viewed online after enrollment.

EFTPS allows employers to make any additional tax payments that their third-party providers are not making on their behalf such as estimated tax payments. “The IRS recommends employers verify EFTPS payments as part of their bank account reconciliation process,” the agency said.

Reprinted with permission of Small Business Tax News, Copyright 2008, 1-301-951-1240. This information is distributed with the understanding that the editor and publisher are not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

Reprinted from Floor Care Professional, October 2008