Staying compliant and accurate on your business’s payroll, employment tax withholding, tax return preparations, reporting and tax payment responsibilities is no easy task.
There are so many laws and regulations to consider, and business owners often lack the time or expertise to effectively navigate tax liabilities and run their business operations. It’s for this reason that approximately 40 percent of small-business owners rely on third-party payroll and tax service providers, according to the IRS.
But based on a newly released report by the Treasury Inspector General for Tax Administration (TIGTA), business owners who use payroll service providers, professional employment organizations, reporting agents, Section 3504 agents, or any other HR or third-party service, are still not safe from payroll tax fraud. Owners working with dishonest, unscrupulous and unprofessional providers may find themselves facing hefty IRS fines, even if they’ve allotted the proper amount of tax payments.
The TIGTA report was prompted by instances where third-party providers received funds from employers to pay payroll taxes, but found that those payments had not been remitted to the IRS. This obviously causes a host of problems for employers who may find themselves having to pay taxes twice.
The crux of the TIGTA report highlighted the inability of the IRS to link third-party payers and employers, increasing the risks related to payroll tax fraud. The report called for the need to create and implement new measures to protect unsuspecting business owners who have been misled by dishonest payroll and tax preparation providers.
HOW DOES A THIRD-PARTY ARRANGEMENT WORK?
Most employers are required to withhold, report and submit employment taxes from wages paid to their employees. These taxes include Federal income tax, Social Security, Medicare tax, state taxes, and unemployment taxes. Depending on the size of an employer’s business and the operating budget, it may be difficult, if not impossible, to do this without the help of dedicated and experienced professionals
Working with a third-party provider allows employers, managers and business owners to focus on the essential, non-administrative functions of their business. Ideally, a third-party service will limit the chance of any costly payroll errors to help employers avoid fines.
However, it is important for business owners to remember that they are ultimately responsible for the timely filing and paying of employment taxes, regardless of their relationships with any third-party payers. This is why it is crucial for employers to work with reliable and honest outsourced human resources providers.
POTENTIAL PAYROLL TAX PENALTIES AND FINES
Tax laws clearly state that any person who is required to collect, truthfully account for and pay over any tax imposed by the Internal Revenue Code, who willfully fails to do so, will be forced to serve any penalties under the law and will be liable for the uncollected amount of taxes.
The term “any person” is especially significant because the IRS has authority to bypass any corporate front and zero in on the specific person who is responsible for withholding payroll taxes. Both the IRS and the court system assign responsibility by determining who has the legal and statutory obligation to make tax payments.
Here Are The Factors They Examine
- Does the person have power over the allotment and appropriation of funds?
- Is the person permitted to sign checks?
- Does the individual have the authority to make decisions in regards to payments made to creditors and vendors?
- Does the individual have control over payroll?
- Is the individual active in day to day management?
- Does the person prepare and sign payroll tax returns?
- Can the individual hire and fire employees?
While there are other factors examined, responsibility for tax fraud is essentially assigned to the person who had principal authority, according to Sec. 6672 of the Internal Revenue Code. The statute goes on to state that when tax duties have been delegated to a non-owner employee, they will likely not be held responsible for any tax fraud. This means a business owner who pawns off payroll tax duties, is not relieved of their obligation to the IRS.
In the past, courts have consistently ruled that a person who has the ultimate authority is still responsible for ensuring accurate and timely payment of payroll taxes. The IRS will assess a trust fund penalty against those who have been found to have willfully neglected payment. The government takes this very seriously and will not stop until it receives the money it is owed.
Failure to pay or collect tax is a felony offense which is punishable by a fine of up to $10,000, a maximum penalty of five years in jail or both. The IRS generally reserves criminal charges for more serious cases, where the government finds that the withheld taxes were used for personal gain (as opposed to pay a vendor or creditor to keep the business open).
BE CAREFUL WHO YOU CHOOSE
The IRS is not a fan of excuses when it comes to paying taxes, especially payroll taxes. This is money that is supposed to be set aside and forked over to the IRS annually. Missing this money is very costly for the IRS, which is why they are extremely strict when it comes to collecting and reporting payroll taxes.
Outsourcing this service is a common strategy business owners use to help regulate themselves and ensure they pay the correct amount, rather than using the money to pay vendors or creditors. However, as noted above, ultimate payroll tax liability does not rest with the outsourced provider.
But for employers who don’t have the time or knowledge necessary to handle their payroll and taxes, how do you know who to trust and who not to?
Here Are Some Things to Consider:
- Choose a company that is verifiably bonded and insured
- Do some research. Does the provider have a history of late filings?
- Communication is key. Make sure your third-party payer is aware of your payroll tax requirements and deadlines.
- Find out if the provider is using the latest technology and practices for an efficient and easy process that keeps your information protected as well.
- You want a provider with a reputation for transparency, accuracy and reliability. Again, this is something you may be able to research beforehand.
WORK WITH EXPERIENCED, KNOWLEDGEABLE AND PROVEN PROFESSIONALS
Not all human resource providers are created equal. TPG HR Services USA works with employers all over the nation in providing payroll, tax preparation and tax filing services. Our staff has more than 35 years of combined HR experience and we are responsible for over 7,000 employees.
You won’t find a more trustworthy and dedicated HR service anywhere in the nation; we work with two of the leading payroll services in the world. Contact us today at 732-917-6000 to learn more about our many HR services and how we can help your business run better.