Not only does payroll represent one of the highest costs for most veterinary practice budgets, it can also carry legal burdens. But whether you contract an outside service or decide to process payroll in-house, by keeping aware of the many risks it poses, you'll do well to eliminate any potential legal trouble in your practice.
Doing your research
Still, outsourcing can intensify certain risks. If you already have or are considering contracting a payroll company for your practice, do your research. When investigating payroll companies, ask for the following:
1. Financial statements and other company information. There is a great deal of financial risk involved when you allow a payroll company (or anyone else) access to employee-due money and related trust funds. Trust funds are legally mandated employee tax withholding that are entrusted to the employer for timely remittance to the appropriate tax agencies. Have a good grasp on the history, reputation and financial position of the payroll company you're considering.
Investigate the company's website, talk with your attorney and accountant to get their opinions, and speak with references, especially other veterinary practices. Many payroll firms are privately owned, so financial statements may not always be obtainable. Interview the owner of the company; don't rely solely on salespeople. Ask for a tour and visit the company's location.
2. A detailed description of the procedures used by the payroll company, and proof that it prepared and remitted required returns and deposits to various agencies. This will provide you with a better understanding of how the company operates, as well as help you design practice procedures to monitor that the company is following through on its contracted responsibilities.
3. Documentation of the service provider's current bonding. Once you sign up with a company, make sure that it sends you proof of bonding annually. Generally, the payroll provider's insurance company will send this to your practice on request.
Mitigating your risk
Once you have settled on a payroll company, develop checks and balances to protect your practice. Well-designed internal controls help you detect errors quickly, and they ensure that information is not corrupted when pulled together by responsible parties or when received from the payroll company.
With that said, be sure to remember that the practice owner is ultimately responsible for any of the payroll company's failings, just as he or she would be for an employee payroll clerk's lapses. This fiduciary responsibility can also be extended to the failure to file required tax returns, fraudulent returns, taxes not deposited, stolen or missing trust funds, and so on.
So, practice owners, take notice! Even though a payroll company may be at fault for embezzling the money, the IRS charges victim employers with thousands of dollars of missing and unpaid taxes and penalties. Allowing the payroll company (or any employee, for that matter) unsupervised control can be very risky and literally bankrupt a practice when things go wrong.
If your practice does engage an outsourced company to prepare reports and submit funds, it is imperative to set up a system for double-checking that the firm is handling its responsibilities. For example, read the payroll company's copies of federal, state and local tax returns. Do they agree with your records and reconciled bank accounts?
Enroll your practice in EFTPS (Electronic Federal Tax Payment System; read more at eftps.gov). This site allows you to view payments being made by the payroll company—or by any other person, for that matter—on your practice's behalf.
In order to ensure accuracy and timely fund submission to the IRS, assign your bookkeeper or other independent employee responsibility for site log-in at each pay period. This employee should verify that EFTPS deposit records match the payroll company reports and that there is no lag time from practice bank account withdrawal to federal account deposit. The bookkeeper should report to the practice owner his or her findings on whether the deposits were made accurately and timely.
An alternative to allowing the payroll company to manage practice funds is for the payroll company to prepare only the necessary documentation and filing reports, then have the practice's internal personnel actually make the payments. Using the payroll company's information and following your instructions, designated employees can go to the EFTPS site and electronically make the requisite deposits.
Whether internally performed or outsourced, payroll processing involves many potential risks—risks that are controllable through good systems of duty segregation. Don't dismiss the benefits of payroll outsourcing, including time and cost savings in addition to removing a concentration of high-risk duties from internal personnel.
In all cases, it is up to you to ensure that your practice implements and maintains proper checks and balances. If these internal controls are enforced, then outsourcing payroll becomes slightly less risky, and you can gladly take advantage of the benefits of using a payroll company. Just always remember that while you can delegate the completion of certain tasks, responsibility for the accurate completion of those tasks cannot be delegated and remains with the practice owner. The payment of employees and remission of trust funds is arguably the most important of all delegated tasks.
Alexandria S. Dove started working at Marsha Heinke, CPA, Inc. in 2012. Dr. Marsha Heinke offers tax, accounting and consulting services for veterinary practices. Visit vpmp.net or call (440) 926-3800 for more information.