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Increasing Electronic Employment Tax Filing Presents Compliance Challenges for Employers

In a recent study commissioned by the ADP Research Institute and written by The Bureau of National Affairs, Inc., under the direction of Managing Editor Anthony A. Harris and Contributing Editor Kenneth Savell, Esq. on Trends in Electronic Filing and Deposit Mandates for Employers we explored how the march toward all-electronic tax payment and return filing at the federal, state, and local levels is creating significant challenges for payroll administrators. Even for businesses that operate in only one state, various agencies likely have separate electronic tax filing systems for different employment 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 also presents difficulties. Businesses that handle employment tax reporting and depositing on their own while trying to stay compliant with all the different e-filing and e-payment mandates and law changes face the greatest challenges. This paper, commissioned by ADP and written by the Bureau of National Affairs, Inc., discusses trends in electronic tax filing requirements and compares in-house versus outsourced payroll tax filing for satisfying federal, state and local mandates.

Increasing Federal Electronic Tax Filing Requirements Place Significant Demands on the Payroll Function

There’s no question that 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. What’s more, as the IRS pushes to meet its 80 percent e-filing goal, businesses will need to either implement new in-house employment tax systems for administering, reporting and depositing or outsource these operations.

State Government Electronic Tax Filing Mandates Present Complex Payroll Administration Challenges

As many state-implemented e-filing and e-payment mandates lower the electronic tax deposit threshold, smaller businesses have no choice but to move to electronic tax filing, placing additional administrative burdens on in-house payroll administrators. 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. In addition, evolving electronic technologies have led states to develop entirely separate reporting systems and requirements, dramatically increasing complexity for businesses that operate in multiple states. With widespread fragmentation expected to continue for the foreseeable future, employers need to consider the best way to handle the increased payroll administration challenges.

Weighing the Pros and Cons of In-House vs. Outsourced Employment Tax Filing

In addition to cost, staffing, and infrastructure, the ability to keep up with evolving governmental requirements is a key consideration in deciding whether to keep  employment tax filing in-house. Implementing legislative changes can be equally complex, especially as states add more information to existing employer reporting mandates. The process of identifying these changes and making modifications to existing systems and workflows is becoming increasingly burdensome for employers that handle employment tax functions in-house.

Tips for Evaluating Third-Party Provider Electronic Tax Filing Capabilities

As employers evaluate third-party employment tax service providers, it’s critical to understand each party’s roles and responsibilities. Even if the service provider contractually agrees to process the employer’s employment taxes, remit those taxes to designated federal, state, and local taxing jurisdictions, and file the related tax returns, the employer ultimately bears responsibility and liability for all deposits and tax returns. An employment tax service provider’s security measures are another top concern since electronic tax filing involves highly sensitive financial and employee information. Finally, employers should visit the website of any potential payroll service provider and check out available compliance tools and resources, such as forms, e-file requirements, filing and deposit calendars, and newsletters highlighting reporting issues and best practices.

Impact of Electronic Tax Filing and Deposit Mandate on Payroll Administration

Even with the push to simplify electronic deposit and return requirements at the federal, state, and local levels, a persistent lack of consistency across agencies in terms of thresholds, methods, and formats continues to challenge even the most diligent payroll administrators. Employers would be well advised to 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 moving forward.

Explore additional reports from the ADP Research Institute.

Learn more about standalone employment tax and unemployment compensation management capabilities from ADP that work with your existing payroll system.


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