Your clients have placed a great deal of trust in you as a payroll and payroll tax expert, and in addition to expecting excellent customer service, they also expect you to advise them on payroll matters and keep them out of trouble.
Historically, the IRS has held the business owner solely responsible for timely remittance of payroll tax deposits and timely filing of payroll tax returns, and has not taken reliance upon a third party as an excuse for failure to pay or file timely. That all changed in 2011 when the IRS enacted the Tax Fund Penalty Recovery Act, which holds third party processors responsible as well.
So not only will your client hold you responsible for advising them if they make poor decisions, the IRS may hold you responsible as well. Save your company unnecessary penalties and potential lost clients by knowing the warning signs that show your client may be on the road to incur failure to pay penalties.
Clients who elect to pay taxes later — I’ve heard it different ways: “I’m having cash flow problems this week, please hold the draft for my taxes.” or “I’m going to pay my taxes when I file the 941.” Of course, there are a million different ways to say it, so you have to listen. But the main theme is a client who is struggling with finances and has elected to defer payroll tax deposits as a means to better manage cash flow in the short term. As the majority of periodic payroll taxes are withheld from an employee’s pay, the IRS considers it theft from employees if the employer fails to remit timely payroll tax deposits.
Clients wanting to convert some or all of their taxes to in-house — This is really a variation of the last point made. You have to listen to the reasons a clients gives for cessation of your payroll tax service. In-house tax processing can be a way for a client to save money on vendor fees. Are they transferring payroll tax processing to their CPA? That’s probably fine. Are they switching to in-house tax processing so they can hold onto employee payroll taxes longer and earn payroll tax float? That’s probably OK too. Did they mention wanting to use payroll tax funds for short term investments or loans? That’s probably not OK. (I’ve heard this last one more times than I’d care to admit.)
Your client may be mis-coding employees. Failure to code employees could result in additional taxes assessed, for which the IRS will attach penalties and interest.
It is always a difficult conversation to have with your client, so be sure to have it in person in lieu of emailing or leaving a voicemail. Go on the assumption that your client does not know they are making a mistake. Approach it as “You may not know, but…” and it may help to direct the to information that can be found on the IRS Web site, it will strengthen your point. If your client truly is making an honest mistake, they will appreciate you pointing it out.