Indiana SB320 Would Prohibit Payroll Services from Handling Withholding
In response to an act of fraud on the part of one payroll service provider, SB 320 would prohibit the Department of Revenue from accepting payment of employer withholding taxes from all payroll service providers. This would be a dramatic change. Since the late 1970’s, at least two million U.S. employers, representing over 36% of the private sector workforce, have relied on payroll service providers to efficiently and electronically handle all payroll-related payments and filings.
NPRC has participated in legislative hearings and recommends that the bill be referred to a study commission. Among our concerns:
- If the concern is for safety of funds handled by a third party, it seems strange to only address state withholding taxes, which is only 3% – 5% of the funds at risk.
- The state could do the same for Unemployment Insurance and Child Support, but this would only address another 1% – 4% of the risk, while shifting more compliance burdens to Indiana employers.
- Payroll firms may not support monthly Forms WH-1 and annual W-2 filings without also handling the actual tax deposits.
- Would be confusing for multistate employers, which would continue to rely on payroll firms to handle all employment tax responsibilities – – except in Indiana. This would invite confusion and errors.
- A primary feature of such services is the simplicity of having the payroll firm calculate all wages, taxes, child support, etc.; collect a single amount to cover all applicable obligations and electronically pay such taxes and file related reports.
- The DOR already has systems to protect against theft of taxes.
- Employers are notified within three days of missing a deposit due date.
- New systems will push electronic payment acknowledgements to employers.
- IRS regulations already require payroll firms to disclose to employers each quarter that they remain liable for taxes, and how to easily verify that tax payments are being made.
While infrequent, when a rogue payroll firm fails, the
impact to client employers has been severe.
The question of oversight and safety of client funds was most recently
studied by the Maryland legislature after a similar failure in 2012. The
industry worked closely with the legislature and state tax authority, the IRS,
Treasury and Congress to develop measures to protect taxes handled by payroll