Payroll Compliance | Tax Compliance | Payroll Tax

ADP Research Institute®


Increasing Electronic Tax Filing Regulations Present Compliance Challenges for Employers

This insight is from: "Trends in Electronic Filing and Deposit Mandates for Employers"

Technology advances and a government push for more efficient collection of payroll taxes and other withholdings are propelling a march toward an all electronic tax payment and filing system, creating significant challenges for employers. Even for businesses that operate in only one state, various agencies likely have separate electronic tax filing systems for different payroll taxes and withholdings; this complexity increases exponentially for employers doing business in multiple states. The migration from paper or magnetic media-based employment tax returns to using a government website or a third-party software program or service further complicates matters. However, given all the different e-filing and e-payment mandates and law changes, businesses that handle payroll tax reporting and depositing on their own face the greatest compliance challenges. This paper discusses trends in electronic tax filing requirements and compares in-house versus outsourced payroll processing and tax filing for ensuring accurate, cost-effective compliance.

Increasing Federal Electronic Tax Filing Requirements Force Employers to Boost Compliance Efforts

Electronic tax filings and payments are here to stay. As of January 1, 2011 the Internal Revenue Service (IRS) eliminated Form 8109, the last link with paper tax deposit coupons, forcing employers to use the Electronic Federal Tax Payment System (EFTPS) for all deposits, including payroll taxes. In addition, the Internal Revenue Service (IRS) is actively pushing to meet its 80 percent e-filing goal. To accelerate widespread electronic tax filing, businesses will need to devote significant resources to administering payroll reporting and depositing operations in-house or outsource payroll processing operations to third party providers.

State Electronic Tax Filing Mandates and Systems Increase Compliance Complexity for Employers

Many state-implemented e-filing and e-payment mandates are lowering the electronic tax deposit threshold, thereby catching smaller businesses and imposing more administrative burdens. The pitfalls for employers seeking to comply with ever-increasing state electronic tax filing and remittance mandates are further illustrated by the varying rules that apply beyond employment tax and unemployment, such as those governing child support remittances. What’s more, as electronic technologies have evolved, states have responded by developing entirely separate reporting systems and requirements. This widespread fragmentation is expected to continue for some time, making compliance an ongoing challenge for employers.

In-House vs. Outsourced Payroll Processing and Tax Functions:  Which Is Better for Compliance?

In addition to cost, staffing, and infrastructure, the ability to keep up with evolving government requirements is a key consideration in determining whether to keep payroll processing and tax filing in-house. Implementation of legislative changes is equally complex, especially as states steadily add more information to existing employer reporting obligations. The process of identifying these changes and modifying systems and workflows is becoming increasingly burdensome for employers that handle payroll processing in house.

Evaluating Third-Party Provider Payroll Processing and Electronic Tax Filing Capabilities

As employers evaluate third-party payroll service providers, it’s important to understand each party’s roles and responsibilities. Even though the service provider contractually agrees to process the employer’s payroll, remit payroll taxes to designated federal, state, and local taxing jurisdictions, and file the related tax returns, the employer is ultimately responsible and liable for deposits and tax returns. Because electronic tax filing systems handle highly sensitive financial and employee information, employers should make sure third-party service providers meet strict security requirements. Finally, employers should consider visiting  the website of any potential payroll service provider to examine available compliance tools and resources, including forms, e-file requirements, filing and deposit calendars, and newsletters providing timely insights on reporting issues and best practices.

Electronic Tax Filing and Deposit Mandate Summary

Even as states focus more on simplifying electronic deposit and return requirements, there remains a lack of consistency and uniformity across agencies in terms of thresholds, methods and formats that will continue to challenge even the most conscientious of employers.  As they plan for the future, employers should carefully assess whether they have the procedures and systems in-house to navigate this complex, ever-changing landscape  and ensure accurate, consistent, and cost-effective compliance with increasing e-filing and e-payment mandates.

*A complete list of sources and citations can be found in the full report.

About This Report: This report was commissioned by ADP and written by The Bureau of National Affairs, Inc., under the direction of Managing Editor Anthony A. Harris and Contributing Editor Kenneth Savell, Esq.

Keywords: Compliance

Business Types: Research for Small Organizations, Research for Midsized Organizations, Research for Large Organizations

Roles: Research for Human Resources Professionals

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