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PAYROLL OUTSOURCING

Excerpt of paper published on March 24, 2006 by the Christian Brothers University, School of Business, Applied Business Review

By James O. Parker, M.A., J.D. M.L.T., Professor, Christian Brothers University, Department of Accounting, Finance, and Business Law

One of the most basic responsibilities of businesses with employees is the duty to withhold income taxes from their workers' earnings and pay them to the U.S. Treasury. However, this duty has proven troublesome for a large number of businesses. The United States General Accounting Office has stated that there are nearly two million businesses with payroll tax delinquencies with a cumulative total of over $49 billion. This total did not include the $15 billion in penalties that had been assessed against those businesses due to their payroll tax delinquencies, nor did it include the delinquent employers' matching shares of Social Security taxes.

Failure to withhold and properly pay payroll taxes is a serious offense. It can lead to the demise of a small business and cause serious financial and legal problems for business owners and even employees. A careful review of the duty of an employer to withhold and pay over payroll taxes is a necessity for small businesses with employees.

Complicated

Business owners need the expertise and time that it takes to calculate the income tax and Social Security taxes to withhold from their employees' earnings, fill out the necessary forms to report the withholdings, and then pay them to the U.S. Treasury. Additionally, regulations require employers to match each employee's payments for Social Security taxes. The matching employer's share of Social Security taxes can be quite burdensome at the current rate of 7.65% on the first $102,000 of earnings for 2008 and 1.45% on all earning over $102,000. The 6.2% difference in rates on the first $102,000 of earnings goes toward Old Age, Survivors and Disability income (OASDI) or what we commonly think of as Social Security benefits. The remaining 1.45% covers the cost of the U.S. Medicare program which provides health care payments, primarily for the elderly.

Personal Liability

The IRS has the right to collect much of the delinquent payroll taxes and penalties from the individual within the company responsible for collecting and paying payroll taxes. The fact that the company was a corporation, a limited liability company, or any other type of organization offering limited liability does not matter as far as liability for the delinquent trust portion of payroll taxes, penalties and interest. Although the liability can extend to mere employees, in most small businesses it is usually one or more of the owners that are held accountable. Of course, this puts the personal assets of the responsible parties at risk of seizure and sale by the IRS in order to satisfy the obligation. This personal liability is coupled with the fact that none of the liabilities can be discharged by filing bankruptcy.

In light of these consequences it is incumbent upon small business owners to become familiar with their duties regarding payroll taxes and give compliance with these duties the highest priority.