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Risky Business: Payroll firms causing tax nightmares for clients

Of all of my clients, big and small, I know very few who process payroll in-house. Instead, most delegate the tedious task to payroll firms like ADP, Paychex and Intuit. Others rely on smaller, more local payroll companies to get the job done. But what happens when the trusty payroll firm goes out of business or files for bankruptcy? Even worse, what happens when the firm your business has counted on for years to pay your employees and your payroll taxes, fails to pay those taxes? The answer is simple: your business is probably on the hook for the outstanding payments. And, even though you might be able to successfully sue the payroll firm for their mishandling of your accounts, the ability of the firm to pay you back? Not looking good.

The Wall Street Journal recently reported on this very situation, highlighting the plight of a small, family-owned flower business in Maryland that received a bill from the Internal Revenue Service for upwards of $20,000 in unpaid employment taxes that its payroll preparer had apparently failed to pay over the years. In this case, it is still unclear what exactly led to the missed tax payments. But in other cases, malfeasant payroll firm owners have found themselves in federal prison and liable for millions in missed and pilfered tax payments. The IRS estimates that small payroll firms have pocketed more than $300 million in taxes from their clients in the last five years.

So, what do you do? You need to process payroll. You don’t have the time, manpower, or knowledge of the ever-changing tax code to do it yourself. You need help.

Don’t be afraid to use a small or local payroll firm – but research the company thoroughly before you trust it with any part of your finances. Require that the firm provide you with regular accounting and explanation of the payments that they are making on your behalf to the IRS and, if you have even the slightest suspicion, get a tax professional to review it for you.

Currently, there are few barriers to companies entering the payroll industry, but help may be on the way. Many business owners, lawmakers and the IRS are now calling for increased regulations and oversight. In the meantime, be your own regulator and know where your hard-earned cash is going – you may never have been so happy to learn that it is going to the IRS.

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