Is your business using an external payroll company? If so, beware of potential tax fraud.
Four out of 10 businesses on average outsource the management of their payrolls to payroll service firms, according to a report by the Washington-based National Small Business Association. But at least two dozen of mostly small payroll firms have allegedly pocketed money from their clients, the Wall Street Journal reported.
An IRS tally based on public records showed that these payroll service firms together allegedly pocketed more than $300 million in taxes, according to The Journal. While the payroll service industry is dominated by large companies, such as Automatic Data Processing and Paychex, many smaller firms have emerged as demand has grown. One in three small businesses spends more than $500 per month on the administration of payroll taxes, and some pay more than $1000 monthly, according to the NSBA’s report that surveyed 1500 business owners in April.
However, there is currently no special license required in setting up a new payroll firm. The Journal cited several instances of small businesses who became victims of payroll service tax fraud. For instance, when AccuPay, a Bel Air, Md.-based payroll firm filed for bankruptcy in mid-March, one of its clients, the Carpet Authority Inc. in Bel Air told The Journal that it had lost at least $30,000 in tax payment over the years.
Small businesses turn to external payroll service firms so that they save time of keeping up with the changes in taxes and other laws. But even among those who outsource payroll, one third of them spend more than six hours per month handling payroll taxes, according to the NSBA report.
You can read more about how to choose a payroll service from a guide by Inc.