Payroll Protection: Seven Tips to Source Secure Providers

A check is handed to an employee

A robust vetting of payroll providers can help maintain compliance and employee satisfaction.

It can be easy to overlook the need to properly assess and compare payroll providers, given everything HR leaders have to consider and strategize for. But not all providers are built the same; longevity and know-how are significant factors in the marketplace. Organizations need payment processing providers who can offer confidence, clarity and compliance.

Let's break down exactly what's at stake and what steps businesses can take to safeguard key processes when evaluating prospective providers.

Where are the Real Risks in Outsourcing?

Not surprisingly, late payments or errors in wage payments are rarely a problem. Employees act as real-time auditors of every calculation in every wage payment, and employers treat any questions or complaints with the highest priority.

However, on rare occasions, there have been incidents in which a service provider collected but failed to pay the employment taxes of its clients. Although rare, these incidents have been very damaging to the affected businesses. Employers can benefit from relying on experts to pay and file their payroll taxes, but the IRS warns that employers remain ultimately responsible for such taxes, even if a third party is making the deposits. Employees are unharmed by such incidents. They are still credited with all taxes withheld as shown on their annual Form W-2.

Confidence: Experience Matters

Organizations depend on payroll services to ensure their workforce is paid, taxes are remitted and adequate records are created to catalog these activities in detail. If a business is unable to pay employees reliably or ensure that tax bills are paid on time, confidence will diminish. Employee engagement will likely suffer, and consumer confidence could also falter if the organization can't lock down these processes and limit the potential for error.

Provider confidence, on the other hand, comes from two sources: reputation and specialization. Payroll partners with industry experience — ADP® has 70 years' worth — and expertise earn their reputation online and in-person, and those who specialize in payroll management invest the necessary time and resources into working with key regulators, assessing current offerings and implementing critical data security solutions.

Clarity: The Tax Man Cometh

While due diligence in provider selection can help streamline and secure payment processing, clarity is critical when it comes to tax payments. You don't want to be left wondering whether taxes have been paid on time and in full.

Here, providers should encourage businesses to follow up on IRS obligations with four simple steps:

Step 1: Enroll your business in the Electronic Federal Tax Payment System (EFTPS), which allows you to verify any deposits made.

Step 2: Know your tax due dates and use the Small Business Tax Calendar to track upcoming payments.

Step 3: After due dates pass, log into EFTPS to make sure payments were received.

Step 4: Always use your business name and address. This prevents money from being transferred to service provider accounts and ensures that all bills or notices are sent to you directly.

The IRS will assess penalties and interest on late or missed payroll tax deposits, even if an employer can show that a third party was at fault. While it's certainly worth using a trusted provider to handle tax payments, they should be providing a quarterly reminder, required by the IRS, to encourage you to double-check their work.

Compliance: Evaluating Provider Potential

Payroll services are complex. Providers must work with financial service firms — who in turn liaise with employee banks — to ensure deposits are made on time and debits are quickly resolved. For many businesses, it's not worth the time and resources required to build in-house payment processing solutions from scratch. Reliance on experts also enables business to offer advanced technologies that employees appreciate, such as direct deposit, electronic pay statements & W-2s; payroll cards (with bill pay, savings and other features), and critical business systems such as time-keeping and workforce management to include work scheduling and assistance with both hiring and onboarding. Payroll firms also facilitate retirement savings plans, pretax cafeteria benefit plans and other employee benefits. They often have extensive research organizations to automatically detect and apply frequent regulatory changes.

Here are seven ways you can check whether your potential provider will meet critical compliance benchmarks:

1) Ask for References and Referrals

Great providers have longstanding clients who are happy to speak about their services and security, especially around handling critical employee and tax information. Consider taking a dual-track approach: Ask your potential partner for direct referrals and ask trusted peers or accountants for their professional opinions.

2) Verify Provider Status

Service providers should be registered with state and federal agencies and should hold a current business license. Compliance here can bode well for compliance in payroll operations.

3) Check Their Credit Rating

Strong credit is a form of compliance. Check the credit rating of any potential partner to make sure they're meeting their own financial obligations before you trust them to manage your key business operations. Ratings from Standard & Poor's, for example, range from AAA all the way down to D. Ratings in the 'A' range, such as ADP's current AA rating, are the standard you should set for your organization.

4) Conduct Simple Searches

Google them. Search for corporate history, relevant news articles and industry awards received. With data security and compliance now generating regular media attention, a quick search can reveal possible red flags or set your mind at ease.

5) Get It in Writing

Compliance in payroll relies on auditable, traceable processes that align with state and federal expectations. Providers should have no problem supplying a written disclosure statement that outlines employer tax responsibilities and explains how to verify that payments are being made.

6) Read Everything

Read all agreements. Ideally, have a lawyer do this as well to check that coverage is included for any penalties if your provider fails to pay taxes on-time or in full.

7) Confirm Their IRS Status

Ask the provider for their electronic filing ID number (EFIN), which allows them to directly file taxes with the IRS. While outsourcing this task to a third-party still meets compliance requirements, EFIN numbers indicate that firms have been vetted and approved by the IRS to handle payroll data.

The Trust Factor

Trust matters. It may seem appealing to prioritize simplicity and speed over security, but a lack of diligence can leave payments and tax obligations sitting in limbo as federal and state agencies investigate what went wrong. Business owners, meanwhile, may be left with substantial IRS debts and fines.

Trust isn't given — it's earned. Providers who offer confidence in their security standards, clarity in their operations and compliance across their key practices are your best bet to build trust and empower business outcomes.

Protecting the security and privacy of our clients and their data from malicious activity is a top priority for ADP. For a current list of security updates and alerts, click here.