In these uncertain economic times, small business owners may think about outsourcing certain payroll duties to third-party service providers.
Alert: The IRS is cautioning taxpayers about tax traps in this area. Outsourcing payroll duties doesn’t relieve your company of its obligations to make timely employment tax deposits.
Here’s the whole story: If your company uses a third-party provider, it can save time and money. Typically, a provider will:
- Administer payroll and employment taxes on behalf of your company.
- Report, collect and deposit employment taxes with federal and state authorities.
But that doesn’t mean your company is off the hook. The IRS provides these three reminders:
1. The company is ultimately responsible for federal tax liabilities even if the third party makes the deposits. If the third party fails to make deposits in a timely manner, the IRS may assess penalties and interest on the employer’s account. In some cases, the company owners and executives could be held personally liable for federal taxes withheld from employee paychecks under the “100% penalty.” Bottom line: Check and double-check to ensure taxes have been paid.
2. If it has concerns about the account, the IRS will send correspondence to the employer at the address of record. Don’t change the record to reflect the third party’s address.
3. The Electronic Federal Tax Payment System (EFTPS) must be used if payroll taxes exceed $200,000 for the year. Register on EFTPS to get a Personal Identification Number (PIN) and use the PIN to verify payments. You can access your payment history online for 16 months.
EFTPS also allows you to make additional payments the third party may have missed, such as estimated tax payments.
Tip: Use EFTPS even if your payroll tax liability falls below the annual $200,000 mark. Enroll online at www.eftps.gov or call (800) 555-4477.