Embedded payroll 101: tax payments, filings and compliance

Behind the Paycheck

The Embedded Payroll 101 Series – Movement of Funds  |  Fraud, Credit Loss, and Security   |  Payroll Calculations  |  Payments, Filings, Compliance  |  Migrations & Transfers

What new payroll providers need to know about tax payment, filing and compliance to help customers

Just thinking about payroll tax payments, filings and compliance can make anyone sick to their stomach. For organizations large and small, it’s a challenge. Interacting with government agencies for payroll is a complicated process that not only takes business owners away from focusing on growing the business, but can also cost hundreds of dollars in fines if not done right. 

That is why new payroll providers need to be diligent about the services they provide and understand how to counter the myriad aspects that can (and will) go wrong.

Why tax payment, filing and compliance of payroll is so complicated

In a perfect world, tax payment, filing and compliance around payroll would be straightforward and easy. But unfortunately, that is not the case in the US. There are a large number of tax jurisdictions, and each has unique requirements.

There are roughly 2,000 tax jurisdictions that businesses need to be aware of. And each jurisdiction carries their own complex tax codes that are specific to their locations.

Each of the overlapping agencies for a given jurisdiction can make updates and changes regularly that affect how companies make tax payments and filing. In fact, it is anticipated that 2,500 updates occur each year just for payroll tax alone.

Keeping up with these updates is a headache even for business owners and accountants who only have a few jurisdictions to track. But as the payroll provider grows, tracking updates and correctly interacting with all the different agencies involved can be a recipe for error for any ill-equipped provider.

What Can Go Wrong with Tax Payment, Filing & Compliance

With so many different jurisdictions, the challenge comes with ensuring that each individual employer has the correct settings in the system for each employee in order for the right data and payment to be sent to the right agency. 

There is no single system to pay all tax agencies. Issues can arise from:

  • Data errors – including typos or inaccurate information
  • File-format errors – including the wrong box checked
  • Inaccurate payment – such as much larger-than-expected or smaller-than-expected payments
  • Incorrectly completed filings – including information that was not verified or is inaccurate

When payroll taxes are inaccurate, business owners lose time as they undergo costly accounting chores to double check or recalculate errors. The price tag only goes up after the IRS sends notice letters that may include audits, penalties, and fines.

The problem is so large, according to the IRS, up to 40% of small to medium-size businesses end up paying a payroll penalty on average of $845 each year.

How to Prevent Errors with Tax Payments, Filings, and Compliance

Though there may seem to be hundreds of ways for things to go wrong with tax payments and payroll filings, and there are, there are ways to lower the chances of your customers receiving the dreaded IRS letter in the mail.

The first is for the payroll provider to be knowledgeable of all the jurisdictions, the laws, and processes for making those payments. The more the payroll provider knows about the agencies and their individual needs, the more the payroll provider can deliver sound service to their customers.

For example: Some tax agencies still use legacy systems or require in-person actions to file and pay taxes. Others, such as Ohio and Pennsylvania, have detailed local regulations providers need to track.

Next is to track changes as they come. When tax agencies make changes, these changes need to be implemented quickly across teams, processes, and technology.

A monitoring system that tracks changes can provide extra means for clients to stay up to date with agency modifications, since they happen quite readily or even overnight and allows them ample time to make adjustments accordingly.

Once the change is put into place by the tax agency, the system needs to automate the update to the back-end such as employer payroll tax rates. Sometimes that also means getting new information from the customer or explaining why they won’t see a tax break anymore — because it expired.

What to do when errors happen with tax payments and filing

The best advice given by mentors and mothers everywhere is to be proactive when errors do happen. This means acting when an error shows up or even before the error occurs.

The most effective way to do this is to build strong relationships with the agencies who send out the notices. If the payroll provider knows agency employees by name, it becomes easier to call those individuals when an issue occurs and to correct it quickly.

When notices do come in, giving customers the ability to upload notices will streamline the process, allowing for rapid responses and time savings.

An additional safeguard for customers is a payroll provider with a customer support team whose leaders actively participate in national payroll councils and have managed this process at scale. When issues arise, that useful advice will help the customer resolve their problem quickly with little need to stay up all night worrying.

Key takeaway

In addition to the 40% of employers that will receive a tax notice each year, 1 in 5 employers owe back taxes to the IRS. Employers want to know what efforts their payroll provider is taking to mitigate those issues and keep their company compliant. 

At Gusto, we have over 10 years experience with common and infrequent tax situations. We know the main drivers of notice volume, and we know what efforts can be taken to reduce the possibility of customers receiving a tax notice.

Failure to make accurate tax payments and filing can cost more money than any business wants to take out of their bottom line. It can also affect the reputation of the new provider. To avoid embarrassing stumbles, consider partnering with a company who has proven they can manage tax payments, filings, and compliance at scale.

Learn more about Embedded Payroll

Download the The Embedded Payroll Stack eBook and the Payroll Beyond the Paycheck White Paper.

Updated: November 15, 2022

Daniel Dean With over 10 years experience in HR tech, Daniel is passionate about payroll and everything HR. As a Gusto Embedded Sr. Product Marketing Manager, he believes this is one of the most exciting times for HR. Whether you're a HR professional, payroll administrator, business owner, or work for a SaaS solution provider, he believes we all have an important role to play in shaping the future world of work for the better.
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