On the Tax Tip 2021-103, the IRS reminds us the importance of using legitimate and reliable payroll services (for example, well known companies such as Paychex, ADP, Gusto, etc.).

The IRS mentioned that “when hiring a company to handle payroll and payroll tax, employers should carefully choose their payroll service provider. This can help a business avoid missed deposits for employment taxes and other unpaid bills. Most of these businesses provide quality service but there are some who don’t have their clients’ best interests in mind. Each year, there are a few payroll service providers who don’t submit their client’s payroll taxes and closedown abruptly. The damage hits their unsuspecting clients hard. Typically, these clients remain legally responsible for paying the taxes due, even if the employer sent funds to the payroll service provider for required deposits or payments.”

Over the years, we have seen how small payroll companies closed without making the required payments to the tax authorities being the client still on the hook for the amount due plus heavy interest and penalties (note that payroll taxes are never eliminated in the bankruptcy procedures). On other occasions, we have unveiled fraud as the payroll companies was charging fees hidden in what they communicated the client to be payroll taxes or charging payroll while the checks were not cashed by the employees. We always recommend reasonableness test for payroll expenses and taxes using the w3 (annual form) and estimates on payroll taxes at least perfomed at year end (if not quarterly with the 941s).