Are You Paid Up?

Many business owners farm out time-consuming payroll tasks. If you do, be warned: Outsourcing payroll functions does not outsource your tax responsibilities.

"Often, when people out-source payroll, they think, 'I don't have to deal with [taxes] anymore,'" says Mary Ash, director at tax, accounting and business-consulting firm RSM McGladrey in Madison, Wisconsin. "That's when they can really get ripped off."

In 2005, the IRS sentenced four owners of financial services firms to prison time after they pocketed payroll taxes given to them by businesses. One got nearly six years after absconding with more than $2 million. If your payroll provider doesn't send the IRS your taxes due, you'll still owe the agency when the fraud is discovered-plus penalties of up to 10 percent. Here's how you can make sure your payroll tax is really paid.

Stay in the loop. Make sure your payroll provider doesn't switch your company's IRS address of record to its own address. Otherwise, you won't see warning notices from the IRS about missed payments

Ask about bond. Legitimate payroll providers should be bonded or have insurance that would reimburse you if your tax funds were stolen.

Confirm deposits online. Have your payroll firm use the IRS' Electronic Federal Tax Payment System at www.eftps.gov so you can track your company's payment history.

Seattle writerCarol Tice reports on business and finance for The Seattle Times, Seattle Magazine and other leading publications.

This article was originally published in the October 2006 print edition of Entrepreneur with the headline: Are You Paid Up?.