Even when companies try to comply with employment tax law, things can go awry. That's why many businesses hire third-party providers to handle those filings. The key here, detailed later in this post, is to hire the correct and reputable service.
A Portland area construction company operator was sentenced to federal prison last week for his role in a multiyear scheme to evade the payment of payroll and income taxes on his workers' wages.
The Aloha, Oregon, businessman was one of six men indicted last December by a Portland federal grand jury on charges of conspiring to defraud the United States.
The 49-year-old's sentencing hearing on May 31 came after he pleaded guilty in March. He was given 30 months in federal prison, plus three years' supervised release. He was also ordered to pay $29.9 million in restitution to the IRS.
The five other defendants are awaiting jury trials, scheduled to begin later this year.
You can read more about the alleged four-year payroll and income tax evasion scheme, which involved $192 million in payroll checks converted to cash and cost the U.S. Treasury $68 million in unpaid employment and income taxes, in the statement issued by the U.S. Attorney's office for the Oregon District.
Tax payroll service option and pitfalls: The six men facing federal payroll tax evasion charges allegedly evaded, knowingly and actively, their business tax responsibilities.
Sometimes, though, companies simply make less egregious errors, in large part because employment tax compliance can be complicated and confusing. That's why many businesses use a payroll service.
But even then, there are tax pitfalls. In the worst cases, unscrupulous third-party payroll companies will take the money and run, accepting a customer's payroll taxes and closing without warning. This leaves companies and their workers in serious tax binds.
Picking a trustworthy payroll service: To help companies protect themselves, the IRS offers these tips on hiring trusted third-party payroll services. There are three key types of business services.
- Certified professional employer organization (CPEO). These organizations generally are solely liable to file employment tax returns and make deposits and payments for the taxes their customers report for wages and other compensation. CPEOs file employment tax returns and deposits and pay their customers' combined tax liabilities with the CPEO's Employer Identification number. An employer enters into a service contract with a CPEO and the CPEO submits to the IRS Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement. Employers can find a CPEO on Public Listings at IRS.gov.
- Reporting agent. This is a third-party payroll service provider that must deposit a customer's taxes with the Electronic Federal Tax Payment System (EFTPS). Reporting agents generally can share customers' information with the IRS to resolve issues. They must also provide customers with a written statement reminding them that the employer, not the reporting agent, is responsible for filing tax returns and paying taxes on time. To inform the IRS of its relationship with a customer, reporting agents submit Form 8655, Reporting Agent Authorization, which the customer signs.
- Section 3504 agent. This third-party payroll service provider withholds, reports and pays employment taxes for the employer. A section 3504 agent assumes liability along with the employer for the employer's Social Security, Medicare, and federal income tax withholding responsibilities. The agent combines all the returns for its employer customers and submits them with the agent's EIN. Generally, employers who use a section 3504 agent must still file FUTA tax returns with their own EINs. To request the IRS to authorize a third party as an agent of the employer, the employer submits Form 2678, Employer/Payer Appointment of Agent.
The IRS also encourages employers to enroll in EFTPS and make sure its third-party payroll service provider uses the service to make tax deposits. EFTPS provides employers online access to their payment history for deposits made with their employer identification number (EIN). This lets the business monitor whether their third-party payroll service provider meets its tax deposit responsibilities.
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