The Wall Street Journal has an important article that every small business that outsources its payroll should read.
About 40% of small businesses are currently using a payroll service. Some outsource to be more efficient. Some use an outside firm to stay compliant with changing regulations. Some small businesses do it simply because they just don’t understand the inner-workings of accrued vacation time and why it needs to be a current liability on their balance sheet.
The biggest threat to using one an outsourced payroll service is what happens if the service goes bankrupt without paying your payroll taxes. In short, the business that hired the payroll firm is typically still on the hook for those taxes.
The article points out that while the numbers of payroll services filing for bankruptcy aren’t huge, there are some firms that are also pocketing the payroll taxes as a way to boost their bottom line:
In the past five years federal officials have prosecuted at least two dozen mostly small payroll firms that together allegedly pocketed more than $300 million in taxes from their clients, according to an IRS tally based on public records.
As a factoring company, we are very familiar with companies that have tax issues. The article recommends using a larger payroll service, such as ADP, Paychex, or even Quickbooks’ Payroll Service to avoid issues of your payroll firm failing and having to pay the tax twice.
Here in Minnesota, however, there are many good, small local accounting and payroll firms that will handle payroll tax returns and payment of the related taxes for small businesses. If you’re outsourcing this duty to a smaller company, it is important to verify they’re doing the work you’re paying them to do. it makes sense to call the IRS every quarter to make sure that those taxes you’re paying to the payroll company are actually making their way to the IRS.
So how does a business get funding if it owes payroll taxes?
If you’re a small business that can’t get working capital because of unpaid payroll taxes, we can help. We recently started working with a business that had some major tax issues. The business owed payroll taxes and the business owner owed personal taxes. The good folks at Tax Guard helped our client work on their tax issues while we provided the business with working capital so they could get current on their past-due payroll taxes. It is a great situation for both the business owner and the company and allows them to get their tax issues resolved.
Give us a call today to find out how we can help you get working capital while your business gets its payroll tax issues worked out.