Solely liable. Jointly and severally liable.
They’re words to strike fear in the heart of any business. Especially in the context of a federal payroll tax liability, where the numbers can be devastating if something goes wrong.
Whether you choose to outsource your company’s payroll processing or to manage it internally, there are processes to oversee and risks to be mitigated.
If you choose to outsource, you may be able to reduce payroll costs and errors, and generally avoid investments in technology and personnel. But you’re relying on a third-party payroll service provider to file your returns and deposit and pay your taxes, and that relationship must be managed.
Just this year, the IRS reported that an employee of a payroll services company illegally diverted more than $20 million in client and client-employee withholdings and employment taxes owed to the IRS.
If you process your payroll in-house, you’re relying on an accountant or bookkeeper for the same filings and deposits, and that employee must be supervised.
Again this year, the IRS reported a case in which an in-house bookkeeper defrauded her employer of nearly $2 million by failing to file payroll tax returns and to make payroll deposits.
You may be surprised to learn that you, as an employer, are responsible for all of the employer and employee withholdings and employment taxes owed to the IRS. Period. Even if you’ve already paid the full amount to a payroll service provider or employee acting on your behalf.
This means you are potentially liable for paying employment taxes and withholdings twice, if your payroll service provider or your own employee doesn’t actually deposit your funds with the IRS and can’t be made to do so. The theory is that you should have monitored their activities more closely.
Perhaps even more troublesome is the fact that the employer’s staff responsible for ensuring these tax deposits were actually made can be held personally liable for certain of these taxes if the employer cannot make the duplicate payments to the IRS.
As a result of these potential liabilities, employers are increasingly taking steps to more effectively manage risk. The IRS also recently published a Fact Sheet with tips for employers who outsource their payroll function.
Let’s be clear: Only a tiny, tiny minority of all payroll service providers are untrustworthy. Most are highly reputable companies providing a needed and wanted service. The same can be said of employees. But if you’re unfortunate enough to encounter a less-than-honest payroll provider—or a fraudulent employee—what can you do to protect yourself?
Managing the Risks
Risk-mitigation steps you can take include the following:
Monitor the tax amounts your payroll service provider—or employee—actually deposits with the IRS by enrolling in the Electronic Federal Tax Payment System (EFTPS). This system provides online access to your payment history, as well as options to make missed deposits and other tax payments online or by phone. More information on EFTPS is available online (www.eftps.gov) or by phone (1.800.55.4477).
Ensure that your address, not that of a payroll service provider, is the address on record with the IRS. It’s another way to monitor the actions of your payroll provider as IRS notices and other IRS correspondence will be sent directly to you. If you process your payroll internally, make sure that incoming mail is received and sorted by someone other than the employee who processes your payroll and makes the deposits.
If you do receive an unexpected bill or other notice from the IRS regarding your payroll taxes or deposits, call the IRS immediately using the number on the correspondence or the IRS business hotline (1.800.829.4933).