3 Ways to Protect Yourself When Outsourcing Payroll

If the words “payroll fraud” make you cringe, you’re not alone. Perhaps you’ve seen a recent story in the national news, but unfortunately, it’s not an isolated incident, as seen in Maryland and Indiana. If you’ve recently started to outsource this task or are just starting to consider it, you might be wondering if it’s a smart, and safe, decision.

Can you stay safe and experience the benefits of outsourced payroll? Yes, if you remember that working with a third-party provider is not a set-and-forget arrangement. These best practices will keep you informed and protected.

1. Understand Accountability (theirs and yours)

Outsourced payroll involves risk and responsibilities for both parties. Understanding what they are and how to stay informed is critical.

Arguably, the scariest part for employers is this: “payment of taxes to a third-party payroll company, book keeper or accountant does not relieve the employer of its obligations to report and pay such taxes to the IRS and the state.   Therefore, if a third-party service withholds, yet fails to remit tax payments, the employer remains liable for any unpaid taxes, along with any penalties and interest that may be assessed for the failure to file and pay taxes” explains Business & Technology Law Group. Considering payroll is one of your biggest and most critical expenses, that’s quite a risk.

Discuss these two ways to manage risks with potential providers:

• Insurance – Payroll providers work with sensitive financial and personally identifying information (PII) and as a result face unique business risks. A provider with liability insurance or accountant’s liability insurance is a sign that they take their responsibilities seriously. Insurance means their processes are underwritten and meet certain professional standards.

• Monitoring – Keep watch over what’s happening with your payroll money and check up on your provider by creating your own EFTPS account with the IRS (under your own Employer ID Number or EIN). Your account lets you verify that monies are deposited on time. Even if you work with a bulk payroll provider that does not use EFTPS transfers, you can still create your own account and observe deposits and disbursements.

2. Insist on Transparency

It’s hard to know all’s well if you can’t see everything that’s going on. Taking steps to verify and preserve transparent interactions and communications includes:

• Access - Make sure all money is transferred under your EIN and that your address remains the address of record in IRS records (not the provider’s). You should still count on your provider to handle any questions on your behalf, however. This may involve granting limited power of attorney to your provider so that they may talk with tax authorities like the IRS or your state tax department, but be sure you’re being updated regularly.
• Service agreement – Read all the terms of service and make sure you understand what you are (and are not) getting before you sign. Look for a provider who can answer questions and explain processes and who is up front about your need to monitor payroll and tax deposits.
• Communication – Ask if your provider is willing to reach out to your CPA or tax preparer if issues arise, or if you have detailed questions. Your provider should be part of your team, just like your CPA or other business advisors.
• Flexibility - Discuss any special requests you have for how you receive reports. For example, if you rely on certain aspects of payroll data for analyzing and planning business expenses, be sure your provider is willing to give you that data, even if it falls outside their standard report format.

3. Investigate Reliability

Can you predict the service, credibility, and expertise you’ll get based on a website or an initial phone call? Not always. Keep these points in mind as you research providers:

• Risk awareness – One of the biggest threats HR and payroll providers face today comes from phishing scams and other cyber crimes.
  • Be sure your provider stays up to date on the latest email and phone scams by subscribing to professional news lists and checking resources like the IRS’s webpage on new threats.
  • Staff should be trained to recognize and report suspicious emails (and never open them)
  • Transactions should be processed over a secure network (not open WiFi) or a system that uses multi-factor authentication for security. Although, it is not recommended to access your third party provider's system over open or public WiFi even if the network is secure. There is still a possibility of information being compromised over public or open WiFi.

• References - Ask for and contact references, both newer and long-standing customers. It’s the best way to find out how the provider handles money, how they work under pressure, and what customers like most about working with them. Be sure to ask how long they’ve outsourced to this provider, if it is their first experience with outsourced payroll, if service or pricing has changed over time, and if they have any concerns.

With outsourced payroll, you’re trying to protect your business and your employees, so think about the approach you’d take with a defined benefit retirement plan or health insurance: know your responsibilities, vet providers carefully, and keep an eye on transactions. The expert partner you’re looking for could be us – get in touch to see how we can help.