Embedded payroll 101: Tax Payments, Filings, and Compliance

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What Payroll Providers Need to Know About Tax Payments, Filings, and Compliance

Just thinking about embedded payroll tax payments, filings, and compliance can make anyone feel queasy. For organizations of all sizes, it’s a challenge. Interacting with government agencies for payroll is a complex process that not only takes business owners away from focusing on growing their business, but can also result in hundreds of dollars in fines if not done correctly.

Just as an iceberg hides most of its mass below the surface, the seemingly straightforward act of payroll masks immense and intricate operational complexities, particularly when it comes to tax payments, filings, and compliance. This hidden complexity is why payroll is fundamentally about compliance with tax laws, with the movement of money being secondary. 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, because when you embed payroll, you’re not merely integrating with a third-party API; you’re buying the infrastructure behind payroll from a partner.

Why are Tax Payments, Filings, and Payroll Compliance So Complicated?

In an ideal world, tax payment, filing, and compliance related to payroll would be straightforward and easy. But unfortunately, that is not the case in the US. There are a large number of tax jurisdictions, each with its unique requirements.

There are an estimated 55,000 tax jurisdictions globally that businesses need to be aware of. Each jurisdiction has its own complex tax codes, which are specific to its location, and these codes are frequently updated

Each of the overlapping agencies for a given jurisdiction can make regular updates and changes that affect how companies make tax payments and filings. It is expected 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 navigating these hidden depths.

What Can Go Wrong with Tax Payment, Filing & Compliance

With numerous jurisdictions, the challenge lies in ensuring that each employer has the correct settings in the system for each employee, thereby allowing the correct data and payment to be delivered to the proper agency.

There is no single system to pay all tax agencies. Issues, stemming from these hidden complexities, can arise from:

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

When payroll taxes are inaccurate, business owners lose time as they undergo costly accounting tasks 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. An IRS letter not only brings financial burden but also diverts valuable time and resources.

The problem is so significant, according to the IRS, that up to 40% of small to medium-sized businesses end up paying an average annual payroll penalty of $845 each.

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

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

The first requirement is that the payroll provider be knowledgeable about all relevant jurisdictions, 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 that providers need to track.

Next, take a proactive approach to track changes as they occur. 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 an extra means for clients to stay up to date with agency modifications, as they often occur quickly or even overnight, allowing them ample time to make adjustments accordingly.

Once the tax agency implements the change, the system must automate the update to the back-end, including employer payroll tax rates. Sometimes, that also means obtaining new information from the customer or explaining why they won’t see a tax break anymore, as it has 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 approach means acting when an error occurs or even before it happens.

The most effective way to do this is to build strong relationships with the agencies that send out the notices. If the payroll provider knows agency employees by name, it becomes easier to contact those individuals when an issue arises and to resolve 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 practical 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 who will receive a tax notice each year, one in five employers owes back taxes to the IRS. Employers want to know what efforts their payroll provider is taking to mitigate these issues and ensure their company’s compliance.

At Gusto, we have over 12 years of experience with common and infrequent tax situations. We understand the primary drivers of notice volume and recognize the steps that businesses can take to minimize the likelihood of customers receiving tax notices. Our ownership of Symmetry, a leading provider of payroll tax compliance services used by various payroll providers like ADP and Paychex, ensures accurate and up-to-date tax calculations and remittance.

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 that has proven it can manage tax payments, filings, and compliance at scale.

Learn More about Embedded Payroll

For a deeper dive into the complexities of payroll and a detailed understanding of how to evaluate an embedded payroll partner, read the whitepaper: Exploring the Hidden Depths of Payroll.