Any business that has had to deal with paying its employees, calculating and deducting social security and payroll taxes, filing employment tax returns, and paying over withheld taxes, understands the appeal of outsourcing employment tax matters. However, out of sight should not mean out of mind. It's the employer's duty to pay employment taxes, and the employer remains responsible for their payment even if the failure to pay is entirely due to a payroll service provider's negligence or fraud.
The IRS understands these issues, and offers the following advice to employers who outsource their payroll tax compliance:
a. The address of record with IRS should not be changed to that of the payroll service provider. That way, if there are any issues with an account, the IRS will contact the employer and thus the employer will be timely informed of problems.
b. The employer should confirm that the payroll service provider has a a fiduciary bond to protect the employer in the event of default.
c. The service provider should enroll in and use the Electronic Federal Tax Payment System (EFTPS). EFTPS maintains a business's payment history for 16 months and can be viewed on-line. This allows an employer to immediately confirm payments electronically, 24 hours a day, 7 days a week through the Internet, or by phone. The IRS further recommends employers verify EFTPS payments as part of their bank account reconciliation process.
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