Payroll Taxes: No Forgiveness from IRS

What's the most important task performed by anyone at your company? If you judge by how difficult it is to get forgiven when you make a mistake, then the answer is definitely payroll. If your employees don't get exactly the pay they're expecting, exactly on time, you

can be sure you won't get anything else done until you rectify the situation. And if you don't remit all the right payroll taxes to the proper government agencies accurately and on time, the penalties start at 100 percent of the delinquent dollar amount. The IRS can (and will) try to collect the taxes not only from the company, but also from the private funds of each "responsible person" as well. And these responsible people (owners, officers, managers, employees who sign checks, and people who are able to influence decisions about the way a company's money is spent) can also go to jail.

If you're reading this article because you're involved in the decision about how to process payroll, it's probably safe to assume you're a responsible person. Just one more thing, before we finish with the fear factor and move on to solutions, the IRS does not presume you're innocent until proved guilty. In a dispute about taxes, the burden of proof is on you.

Although payroll withholdings seem to get more complex as the years go by, the good news is that options for managing the payroll process continue to grow and improve. This means you have considerable freedom to choose the one that works best for your workstyle, your preferences, and your company's budget.

People often talk about whether to outsource payroll or do it in-house. But, the choice isn't so black and white. In fact, you can't entirely outsource your payroll. Someone within your company has to decide what salary or wage each employee will get; make sure you're paying both salaried and hourly people at least the minimums required by law in your area; track and report how many hours your nonexempt staffers work; and apply your company policies relating to voluntary withholdings for health insurance, retirement plan contributions, and so forth.

Once you've done all that, some employers feel there's not much added benefit to involving an outside payroll company. Cheryl Kaupalolo, business manager for the Montessori School of Maui, says, "We only have about 40 regular employees. Payroll takes about two hours twice a month. I have looked at outsourcing it, but so far it seems that would be just as much humbug and cost us more money."

On the other hand, Robert Kaner, the president of a small interior design firm in New York City, signed up with an outside payroll company immediately upon going into business four years ago, even though his was the only paycheck being produced back then. He had other things to do and didn't want to spend his time learning about withholding taxes and quarterly filings. "It would be incredibly complicated for me to figure out everything I have to do," says Kaner. "It's overwhelming even to a former corporate lawyer like me."

For those who want help, like Kaner, there are a number of companies that specialize in payroll processing. Those companies will help to set up your system, train you in what you need to know, and take upon themselves various levels of the responsibility for timely and accurate reporting as well as produce the actual paychecks. The largest of these is Automatic Data Processing Inc., better known as ADP (www.adp.com), which claims more than 600,000 clients and 55 years of experience. The other large ones include Paychex Inc. (www.paychex.com), which has a 35-year history and 561,000 clients; and Ceridian Corp. (www.ceridi an.com), founded in 1932, which takes credit for 110,000 clients, including more than 50 percent of the Fortune 500, in 38 countries.

After that, there are countless smaller companies, including, quite possibly, some local ones right in your own area where you could go and meet the experts in person. Whether that's more appealing to you than the value added by the broad experience, corporate longevity, and economies of scale that a big company can offer is a matter of personal judgment.

Jeff Goldenberg, a partner in the Press Gold Group of Bloomington, Minn., explains it this way: "You can get a hamburger and fries and a drink at McDonald's, and you can get the same items at a neighborhood diner. But the quality and the atmosphere are going to be different. We're the place for people who like the neighborhood diner." The extra value that his relatively small firm can offer is "a much more complete hands-on customer service." When clients call Press Gold, they speak to a certified payroll professional (a distinction offered by the American Payroll Association) who's familiar with their account, instead of having their call transferred to a "sea of cubes" where, Goldenberg says, "they're likely to speak to a poorly trained person who knows little about their business."

User comments on the big companies vary all over the love-hate spectrum. A recent informal poll of CFOs about ADP and Paychex yielded a pretty equal number of mentions using words like "abysmal" and "excellent" for both. In many cases, the large companies assign specific individuals, or groups of individuals, to manage your account. If those people are good at their jobs and you like working with them, you're going to have about the same experience as someone working with a small, local company. In the words of Delores Quinn, CFO of the Old Trail School in Bath, Ohio, who's worked successfully with both Paychex and ADP, "I would say that each payroll service is as good as the local office makes it."

In all cases, of course, the ability of the payroll service to do a good job for you depends on your ability to deliver accurate information to them. Most will offer you either a software program through which you enter your data and then transmit it to them electronically or access to a Webbased system that functions essentially the same way (except it doesn't require you to install anything on your computer and it's accessible from other locations, in case you don't want to be tied to your office computer all the time). Some companies allow you to telephone them with the data instead of transmitting it online, and Press Gold will even accept faxes, although it usually charges a little more for that since its staff has to do the data entry.

At this point, you may realize that once you've done all that data entry, you could just print out the paychecks yourself. Yes, you could, especially if you have the right software to support your needs. If you choose this route, the key things to look for, in addition to all the normal software things, like a good user interface and a reasonable price, include:

* accurate tax tables for your specific area as well as for the federally mandated withholdings

* assurance that the company is diligent about updating all tax rates when changes occur

* excellent customer support-you can't afford to have downtime with this

* the level of involvement you want in the production of documents and transmitting of funds.

Some people, like Tamara Evans, a fiscal assistant for a Santa Rosa, Calif., nonprofit, are organized enough to be comfortable that they'll always send in their tax payments on time. Tamara uses the Payroll and Labor Distribution module of AccuFund software to calculate and produce payroll checks for her company. "It does not automatically pay the taxes," she explains. "It generates a bill for them, and then we make the payments electronically the same day payroll checks are issued. We do this every payday for all payroll taxes as a standard procedure, so there is never any withholding that is kept in the bank for any length of time. As far as avoiding slip ups, we just make sure we have a complete procedure, including all necessary steps for the payroll process, and check off each item. As the main payroll person, I'm certainly aware of the responsibility to transfer the withholding to the government and make sure it happens. Anyone I train will also have that drummed into them."

On the other hand, I once worked for a company with constant cash flow problems, where my boss sometimes pressured me to hold back the tax payments if she needed the money to cover other expenses. Eventually, I insisted on switching us to a full-service payroll company that wired our tax money directly, so there was no room for management discretion about when to pay them.

Managing your payroll perfectly is just as crucial whether you're producing hundreds of paychecks a week or you're running a small business where you're the only employee. Even for die-hard do-ityourselfers, getting the right level of help is well worth whatever it costs. So, find the service or software, or a combination of the two, that makes it easiest for you to sleep at night, and you'll have some energy left over to apply to the more interesting parts of your business.

THE QUICKBOOKS OPTION

Intuit Inc., maker of the very popular QuickBooks accounting software programs, offers an option for nearly every payroll preference, including:

QUICKBOOKS BASIC PAYROLL, which produces your paychecks but not your tax forms

QUICKBOOKS ENHANCED PAYROLL, which produces the checks and the tax forms

QUICKBOOKS ASSISTED PAYROLL, which not only produces checks and forms, but also offers direct deposit services, remits the withholding taxes, and produces your W-2s at the end of the year

INTUIT ONLINE PAYROLL, a full-service, Web-based system that takes care of all of the above and doesn't require you to use QuickBooks accounting software at all.

For more information about these, visit www.payroll.com.

 

Heather C. Liston is a freelance writer based in San Francisco.