Why Your Business Should Use a Reliable Payroll Service
If your business has employees, you likely know how important it is to pay them on time. As small business owners, we oftentimes rely heavily on our employees. However, an equally important cost that is oftentimes overlooked is remitting the associated withholding and employment taxes to the government on time. A good payroll service can help you meet your payroll compliance obligations.
I get it—small businesses at times have limited funds. You may be faced with a choice to pay all of your employees their net paychecks on time or to pay the government its share and have only enough funds to pay some of your employees. If you choose the first option to pay only your employees’ net paychecks and not the associated taxes, serious consequences can result for your company and its owners when payroll taxes become past due.
Consequences of Failing to File and Pay Payroll Taxes
If you have been through the process of applying for a Federal Employer Identification Number and/or registered your business with the state for withholding tax, unemployment tax, or other payroll related registrations, you may recall that the agency first obtains information about your business such as its legal name, address, its tax classification, and other demographic information. However, almost immediately after doing so, there is generally a section that asks about the “responsible persons”. The responsible persons are generally all owners, general partners, principal corporate officers, or LLC members of the business whom the IRS or state agency can pursue personally if the business fails to file or pay its payroll taxes. The taxing agencies require the names, titles, phone numbers, social security numbers, and addresses for all of these individuals within the application so that if the business fails to file and pay its payroll taxes as required, the taxing agencies can take civil and/or criminal action against the persons listed.
Many business owners opt to form corporations or limited liability companies to avoid personal liability for business debts. But if you are considered to be a responsible person who willfully failed to file or pay payroll taxes, that liability shield will not exist for you in this context.
What is the Trust Fund Recovery Penalty?
The IRS has instituted a “Trust Fund Recovery Penalty” (TFRP) for all responsible persons who willfully fail to file and remit payroll taxes on time, and many states have similar penalties that they enforce. “Trust funds” as indicated in the name, refers to funds that the employer holds in trust until the money is paid over to the government, such as the employee’s federal tax withholding and the employee’s share of Social Security and Medicare taxes. When the employer and employee agree on a wage or salary, any deductions that are taken from the employee’s salary no longer belong to the employer, and it is essentially theft to take those deducted funds from the employee’s check and designate them to another purpose of the employer rather than paying them as agreed to the government.
All responsible persons may not necessarily be liable for the TFRP. The responsible person must have been (or should have been) aware of the outstanding taxes and intentionally disregarded or was plainly indifferent to the obligation to pay the taxes. The IRS does not require a bad motive to assess the TFRP against a responsible person. If you take the payroll tax money and donate it all to charity or use it to prevent your employees from being laid off, the government does not care. In fact, if your business is not meeting its payroll tax obligations over a substantial period of time, the government oftentimes will not see your business as viable and would prefer to have you shut down if you are not going to operate lawfully.
The Decision to Use a Payroll Service
A great way for employers to ensure that payroll tax filing and payment obligations are met is to use a reliable payroll service. I have bolded the word reliable because using a payroll service does not alleviate the employer’s liability for the payroll taxes. If the employer uses a less-than-reputable company that scams the business out of its payroll tax deposits, the IRS will still be looking to that employer and its responsible persons for the money. The employer is responsible for conducting due diligence in selecting the payroll service to handle its payroll tax filing and payment obligations.
When I first started out in public accounting several years ago, I worked for a small firm of about 30 CPAs. One of my first steady responsibilities was handling payroll for several of the firm’s clients. At that time, most of the paychecks were printed and physically handed to employees, but as time passed employers began to transition mostly to direct deposit. The more this transition occurred, the more it occurred to me that it likely makes a lot more sense to use the big players in payroll rather than a local accounting firm. Using the big players is generally less expensive, more efficient, they oftentimes provide guarantees with respect to accuracy, and they generally have significant assets/financial ability to cover their mistakes, even with respect to large amounts.
Today, I recommend to all of my clients that have employees to use a reliable payroll service, preferably one that handles full-service payroll (including all filing of reports and remitting the payments to the taxing authorities). In a crunch, I am able to assist a client or two with the filing of reports, but the laws change so rapidly, and it is simply so much more efficient to use the big players to handle payroll. Payroll is all that they do, and they do it well.
What Can Be Done About Past Due Payroll Taxes?
If you have received a notice from the IRS or state taxing authority about past due payroll taxes, it is definitely not to be ignored. The first step I would recommend would be to hire an authorized representative (Attorney, CPA, or EA) to assist you with determining your next steps, which will vary based on the facts and circumstances. A notice may need a response that day to prevent levy action, or there may be time to get returns filed and caught up before contacting the agency. But doing nothing, when the government can (and will) come after you personally, is never a good option.
If you have received a notice about past-due payroll taxes or have failed to file or pay them as required, please contact me using the form below and we can discuss your options.