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Finance & Accounting, Taxes

Protect Your Business from Tax Liabilities Caused by a Third Party Failure

Protect Your Business from Tax Liabilities Caused by a Third Party Failure

It can take a weight off your shoulders to hand your tax payment and payroll services over to a third party. It’s one less thing for you to worry about when you’ve got so many other things vying for your attention. But what happens if the service provider goofs up, or deliberately steals your tax payment? It’s their fault, isn’t it? Not so fast. You’re still the responsible party, at least in the IRS’ eyes. Here’s what you need to know to stay on the safe side of the law.

First, What Does a Third Party Service Provider Do?

There are different types of service providers, such as payroll service providers or tax specialists, who handle duties on your behalf, such as:

  • Administering payroll and employment taxes on your behalf
  • Reporting, collecting and depositing your employment taxes with state and federal authorities

Certainly, you can take care of your own employer federal employment tax obligations, but because they’re experts at it, it makes sense to let them handle it for you. But be aware: depending on the type of third party arrangement your provider has with the IRS, it could be you and not the agent who has the responsibility if something goes wrong.

If Your Payroll Service Provider Isn’t Paying Your Federal Tax Deposits…

Every month you get notification that your provider has automatically sent what you owe on your payroll taxes to the IRS…but months down the road, you get a nasty letter from the IRS saying they haven’t received a dime.

As much as you want to point the finger at the faulty service provider, you are the one ultimately responsible for ensuring your taxes get filed and paid on time. You still should file a formal complaint with the IRS, and there’s a streamlined process to handle this situation.

If Your CPA Oversees Your Payroll and Incorrectly Estimates Payroll Taxes…

In this situation, it may be the CPA who is responsible for payroll tax penalties. If courts find your CPA to have “significant authority over the finances of the client” (that’s you), he could be considered the responsible person in this scenario, and could be responsible for paying a pretty hefty fine.

The bottom line is: you can’t definitively wipe your hands of the responsibility of filing and paying payroll and taxes just because you hire someone else to manage them for you.

How to Prevent Liability Issues

Finding the right service provider is well worth the time investment, because doing so could prevent you from having the issues outlined above. Start by asking your network for referrals. Who do other business owners you know use for their payroll services? Have they had any issues with them? How long have they worked with them?

Once you have a few candidates to check out, spend some time researching them online. Make sure their services line up with your needs, and look for a trust seal (like Norton or TRUSTe) at the bottom of the website, which is an indicator that the site has been vetted by a third party to determine authenticity of a business.

The next step is to look for online reviews for the brand. What are others saying about them? Are there any red flags, such as it being difficult for customers to get in contact with them, that should make you think twice about hiring a provider?

Once you have your top three picks, schedule time to speak with a representative of each. It’s a bit like hiring an employee: you should have a list of questions you want answered. These could include:

  • Have you worked with others in my industry?
  • What’s your process for filing payroll taxes and payments?
  • What evidence do you provide me that the payment has been processed?
  • Have you ever been sued by a client?
  • Can I speak with some of your existing clients?
  • Have you ever had liability issues on behalf of your client?

Listen for the right answers, to be sure, but also listen to your gut. If you feel like this individual is telling you what you want to hear, rather than the truth, that company isn’t a good fit. The good news is: liability issues are relatively small, probably given the simple fact that if a company were to be dishonest and keep a client’s tax payment, the world would soon know, thanks to social media and online review sites.

Still, to be safe, once you hire your payroll provider, make sure to get confirmation from the IRS that they have received the regular payroll tax payment, and sit down with your payroll service provider once a quarter to go over your accounts. Staying tuned in could help you prevent a much bigger — and costly – problem down the road.