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Employment taxes: the downside of using outside firms

Employment taxes can be a big headache for businesses. After all, state and federal income tax withholding is only part of it. There is also withholding for Social Security and Medicare taxes and payments to match employee contributions.

It is little surprise, then, that many business owners contract with outside firms that take the administrative tasks of payroll taxes off their hands. In California and across the country, relying on these outside payroll firms has become standard practice for many companies. An estimate 40 percent of small businesses delegate payroll tasks to such firms.

What happens, however, those firms drop the ball in some way or engage in outright fraud? When this happens, business owners can find themselves in trouble with the IRS for unpaid employment taxes.

In a recent case in Maryland, a payroll firm filed for bankruptcy and became the subject of a fraud investigation. The investigation was begun by local enforcement and then turned over to the IRS. Meanwhile, businesses who were clients of the payroll firm are facing efforts by the IRS to collect unpaid taxes.

The incentive to outsource payroll tax duties is strong, because small firms often struggle to find the time to comply with all of the requirements. It can seem much more efficient to simply contract with an outside provider to take care of things.

But clearly there is a risk involved for small firms in third-party payroll management. If the outside firm fails to fulfill its duties, businesses that hired those firms may be on the hook for unpaid taxes.

Source: "Tax Surprises Can Follow When Payroll Firms Implode," Wall Street Journal, Angus Loten, 4-24-13

Please visit our page on payroll taxes.

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