Many employers outsource some or all of their payroll and related tax duties to third party payroll service providers. These related tax duties may include withholding, reporting, and paying over certain employment (i.e. FICA, Medicare, SDI) and income taxes to the Internal Revenue Service (IRS) and California Employment Development Department (EDD).
Using a third party payroll service provider has many benefits, including helping to ensure that filing deadlines and deposit requirements are met, and can make an employer’s business operations more efficient. However, employers that outsource payroll tax duties should be reminded that they remain liable for unpaid taxes. (In certain situations, employers who are customers of a Certified Professional Employer Organization (CPEO) are relieved of their liability for income tax withholding and social security and Medicare taxes.)
Even though the employer may forward funds to the payroll service provider to make the tax deposits, the employer is the responsible party. If a payroll service provider absconds with the funds or fails to timely make the required deposits or payments to the IRS or EDD, the employer is still on the hook. The IRS and/or EDD may assess penalties and interest on the employer’s account, and the employer is liable for all the taxes, penalties, and interest due.
There have been recent prosecutions of individuals and companies who, under the pretext of acting as a payroll service provider, have stolen funds intended for payment of employment taxes. Employers should take the following steps to protect themselves when using a third party payroll service provider:
- Enroll in the IRS electronic federal tax payment system (EFTPS) and EDD e-services so that the employer can monitor deposits; and
- Make sure all correspondence from the IRS and EDD about payroll taxes goes to the employer’s address, not the payroll service provider’s (a 2015 law aimed at protecting employers from crooked payroll agents requires the IRS to send out confirmation notices when it receives an address change).
An employer who believes that a bill or notice received is a result of a problem with its payroll service provider should contact the IRS or EDD by calling the number on the bill or notice. For questions or assistance, please contact the author or your usual counselor at AALRR.
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