Common Pitfalls in Payroll Tax Compliance (and How to Correct Course)
Written by:
David Lewis
CEO
The permanence of remote and hybrid working accommodations is a clear reality, and flexible work environments are more widely accepted than ever before. Yet, with remote work comes a variety of regulations and compliance issues firms have overlooked along the way.
Perhaps most prominent is the impact remote and hybrid working conditions are having on payroll tax reporting and compliance. Failing to comply can cause problems for your company.
This article will discuss some common mistakes in payroll tax compliance and how to fix them and avoid serious consequences.
Payroll Tax Compliance Problems
More firms are finding themselves to be non-compliant with payroll tax. Before the pandemic, most organizations had employees who performed their work at a centralized office—often the company headquarters. This made payroll taxes straightforward in that companies could report based on a single location and only needed to worry about compliance with one set of local and state laws.
In this new normal, the shift from centralized to remote or hybrid work had a direct impact on how businesses should report and pay payroll taxes to different municipalities and states. Many businesses, and even accountants, overlooked the severity of the impact, thinking the situation would be temporary.
This issue has risen to the forefront of business operations for many as the permanence of remote and hybrid work has forced employees and employers to acknowledge the vast difference between the place of business and the places where work is done.
This is due, in part, to an increase in attention given to the matter by tax professionals who are helping their customers find the best deductions and criteria submission for their financial needs. Most times, it is more advantageous for employees to pay taxes based on their suburban location than the metropolitan region where their employer may be headquartered.
Consider the remote employee who lives in Kansas but is employed by a firm in New York City. The taxation should occur for the state of Kansas, whose argument will be that the work is being done in their jurisdiction, regardless of the location of the employer. Those taxes are likely more profitable for the employee filing their income taxes.
Businesses now need to be cognizant of where they are hiring people from, not just who they are hiring. There are two situations where this can occur: when hiring people in other states and when hiring people locally who then perform work in other locales. In both cases, the company owes taxes to those locales, which can include everything from state to county laws.
Hybrid and Remote Employees and Payroll Tax Compliance
Hybrid employees pose a unique taxing situation where businesses can benefit from working with a taxation professional or outsourced human resources consulting firm that can provide best practices for ensuring compliance. Aspects to consider include how often the individual works from home, how often they report to the office, what tools or measures are used to discern between the two, and how the company can best manage the taxation.
Completely remote employees present an equally complex taxation situation to navigate. While this can make it easier to access the right fit for a particular role without restricting a candidate search based on geography, it complicates the taxation process. Those states have the right to have taxes paid to them for the work done within their boundaries, but many companies fail to realize this. The result can be a difficult tax compliance meltdown that requires everything from audits to amended returns, which can be time consuming and costly.
To avoid this, businesses with remote and/or hybrid employees need to take a proactive approach to payroll tax compliance. Payroll administrators need to understand everything involved with registering as an employer in all applicable states and counties where work is performed on the company’s behalf.
Third-Party Payroll Administrators
Most companies need to establish a payroll-related practice specific to taxation, like contracting with a third-party payroll administrator, which typically includes a technological platform intended to simplify input and reporting. Yet, these systems are only as reliable as the data that the users input. Updates are common for events such as sales commissions, benefits changes and deductions, or bonuses. Individual employee locations are updated much less often.
The good news is that entering where and how work is being performed with a third-party system can often automate reporting. These platforms are designed to provide several key services, including ensuring the appropriate taxes are taken out of checks and then paying those taxes.
However, companies that do not realize they need to input this data in the first place, or regularly audit their employees to ensure the data they submit is accurate, can find themselves quickly falling out of compliance.
Payroll Tax Compliance Consequences
When talking about compliance, there is typically also talk about consequences. The business impact of non-compliance can be severe. More employees are realizing it is to their own benefit to be taxed based on where they are performing their work and finding that their employers have not been accurately reporting and paying out taxes as needed.
This results in a poor rapport with employees who may find that they owe more than was deducted from their paychecks because of non-compliant reporting. Companies can also be subject to penalties and fines as states, and even counties, lay proper claim to taxes that went unpaid. The process of amending tax returns and the trickle-down effect that this can have on internal processes can be costly and create paperwork and logistics nightmares.
Ensure Payroll Tax Compliance with a Trusted Partner
Successful companies are more than just payroll tax compliant. They create procedures and processes that help them remain efficient and effective business administrators. This establishes safeguards for compliance and operations that cultivate strong relationships with their employees while also preventing avoidable errors that can create headaches in the future.
Many companies don’t realize the potential for non-compliance until they become non-compliant on a particular issue. Working with a firm that is well-versed in all the potential pitfalls that can befall a company can prevent issues from occurring in the first place.
With over 20 years of experience across all industries, our payroll subject matter experts can simplify the process and help keep your business compliant.
For more information on payroll tax compliance, visit our website.
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