Published May 14, 2004 in the Portland Press Herald
Owning and managing a small business presents owners with a myriad of
important decisions. Managing payroll - from issuing paychecks to paying related
taxes - is often outsourced to payroll services, freeing up personnel for key
activities in-house. Although hiring a payroll service helps to simplify daily
business operations, recent events have shown that owners hold ultimate
responsibility to the government for how their payroll is managed. Fortunately,
the Legislature just passed a new payroll tax protection law, which helps to
keep the relationship between payroll processors and businesses running
smoothly.
The relationship between businesses and payroll services usually involves, at
the simplest, a payroll processor that prepares paychecks for employees. Almost
all services will also prepare and file an employer's payroll tax returns and
make payment of the related taxes, both with the Internal Revenue Service and
the State of Maine. The taxes covered by these returns include Social Security
taxes and the income taxes withheld from employees' paychecks, as well as
unemployment tax contributions.
Business owners must note that by law it is
still the employer's responsibility to see that these funds are, in fact,
delivered to the government. That is, the ultimate responsibility for tax
payments cannot be assigned to a third party, such as a payroll service.
Basically, the business owner guarantees the government that anyone he hires to
perform payroll tax services will do the job properly. If a payroll service
fails to deliver payment to the government, for whatever reason, the employer
may have a lawsuit against the service, but the taxes (and quite possibly
interest and penalties) are still due.
Business owners should be aware that the Maine Legislature recently made
substantial revisions to the existing laws governing payroll processors in order
to strengthen the regulation of payroll processing companies in various
respects, the highlights of which are:
Payroll processors are now required
to maintain a surety bond in an amount between $100,000 and $500,000. Bonding
companies are required to notify the state if a bond is canceled, terminates or
lapses. Substantial penalties (up to $7,500 per day) apply if a processor
operates without the required bond.
Responsibility for oversight of payroll processors has been shifted from
Maine Revenue Services to the Department of Professional and Financial
Regulation. Except for those processors owned by financial institutions, the
Office of Consumer Credit Regulation within the department will have authority
over processors.
Processors now must obtain a license as opposed to simply registering, and
are subject to regular audit by the department. Substantial penalties apply for
failure to obtain the required license.
The department has the ability to appoint a receiver to take control of a
processor under certain circumstances.
Processors are prohibited from designating themselves as the sole recipient
of notices for unpaid taxes. The processors are required to provide businesses,
at least quarterly, with an accounting of funds received from the employer and
how they were disbursed, together with the specific method(s) whereby each
employer can contact state and federal tax and unemployment insurance
authorities. Those methods include but are not limited to Internet address and
toll-free telephone number information, to verify that payments have been made
and properly credited on behalf of the employer.
The vast majority of payroll
services are owned by reputable and trustworthy people and operate in complete
compliance with the applicable laws. However, recent events have shown that
there are exceptions, which should demonstrate the importance of hiring a
trustworthy payroll service. The double expense, or worse, that can result from
a mistake in processor selection can present tremendous hardship for the
affected companies.
Business owners can protect themselves by thinking proactively, and using
some good common-sense advice. First, a business owner should absolutely confirm
that any payroll processor it uses has registered and posted the required bond.
In addition, the importance of regular confirmation of proper payment by the
processor cannot be overemphasized. No amount of legislation can totally
eliminate unlawful behavior. Further, the aggregate exposure of a processor to
all of its clients can exceed the amount of its bond. Consequently, even with
this helpful legislation, the risk of loss from processor misconduct has not
been eliminated.
Fortunately, the confirmation process is fairly easy. By enrolling in the
Electronic Federal Tax Payment System (www.eftps.gov), a business can access its
federal tax payment history online at any time. Maine Revenue Services does not
yet have an online equivalent to EFTPS, but will provide a transcript of payment
upon request. If a discrepancy appears, the business owner should act quickly to
determine the reason. Red flags should immediately go up if the processor blames
the taxing authorities or offers any excuse that has the consequence of allowing
additional time to go by. Needless to say, any statement by the processor that
the problem has been resolved should be verified by the employer directly with
the applicable agency.
Michael Sheehan is a lead attorney specializing in
tax matters and estate planning at Preti Flaherty in Portland.
