Who is responsible when the payroll service screws up?

A new legal case might give some insight to responsibility for compliance with the maze of federal, state and local laws controlling electronic banking and payroll transactions

Most small businesses that pay employees or contractors use a third-party payroll accounting service to handle the required record-keeping and tax payment transactions. These services are inexpensive, typically $500 to $1,000 per year, considering the larger savings of time and money derived as a result of their use. A payroll service can be incorporated into a small business comprehensive accounting service agreement to further reduce the cost and improve reliability. (Generally bundled services are priced lower than if each service were contracted separately). Payroll processing services vary widely and clearly not all are of the same caliber of service and reliability. Small business accountants like myself spend considerable time evaluating the various options and paring specific business clients with the best payroll service provider for their specific business and accounting situation.

The IRS says that nearly 40% of all small businesses eventually pay fines and penalties for failure to process payroll transactions correctly. Fines for failure to file or late filing of W2 and 1099s doubled in 2015. Recently IRS reported to Congress that it will intensifying efforts to increase payroll compliance.  Increased enforcement attention is likely to be focused on the smallest businesses and household employers. Even though the payroll tax obligations of each is small, IRS says the total combined loss of tax revenue is more than $100 million.

On top of IRS compliance issues, small businesses face an even greater number of problems dealing with various state and local payroll-related issues. Worker’s compensation audits, local wage tax audits and penalties, unemployment tax issues are only some of the issues.

Unfortunately I’ve seen too many of these payroll-related penalty cases. A big part of my work with small businesses is fixing payroll errors of the past and making sure they don’t happen again. Today’s automated online payroll processing services go a long way toward resolving the problems.

Today’s online payroll processors say the question of penalties for their clients is moot since errors simply don’t happen. I’m not entirely convinced, although I recognize that it would be difficult or impossible to pin the blame solely on the payroll processing company. Under these systems, it is far more likely that some other issue is to blame if payroll is not processed correctly. But what happens if the payroll processor really is at fault?

A new legal case in Ohio might lead to some insight. A small business is suing Intuit, makers of QuickBooks, for failure to timely process payroll transactions. I am likely to follow the progress of this case to see if it leads to any outcome that might be useful to other businesses.