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How Working with an IRS-Certified PEO Can Help You Avoid Missed Payroll Penalties


Quick look: Business funds being tied up due to unforeseen financial events or uncertain markets can feel catastrophic. These types of occurrences leave company leaders at a loss for how to pay their employees, and ultimately, puts them at risk of being fined, or worse. Having a professional employer organization (PEO) partner to evaluate options from all angles can help prevent penalties and keep your company running smoothly.

Regardless of the circumstances, employers are legally required to pay their employees on time. Unfortunately, a missed payroll comes at a much higher cost than simply workforce disruption. When funds are inaccessible, employers are immediately exposed to penalties and potential personal liability as not paying employees is illegal.

There are both federal and state repercussions to consider, which must immediately be rectified to dissuade further damage. A PEO can step in to handle these types of challenges, but more importantly, plan ahead for worst-case scenarios. They are responsible for staying ahead of changes affecting the workforce and ensuring companies stay protected.

Here’s a glimpse of what employers may face when payroll is missed and why having a PEO partner is a strategic business move.

Federal employment tax penalties

A Failure to Deposit Penalty is applicable to employers who don’t make employment tax deposits on time, in the right amount, or in the right way. Employment tax includes all federal income tax, social security, and Medicare taxes owed, as well as taxes for federal unemployment. These deposits are due to the Internal Revenue Service (IRS) on a monthly or semi-weekly schedule to avoid penalty fees. These fees are calculated based on how many calendar days the deposit is late as listed below:

  • 1-5 calendar days equal 2% of the unpaid deposit
  • 6-15 calendar days equal 5% of the unpaid deposit
  • 15+ calendar days equal 10% of the unpaid deposit
  • Any time exceeding 10 calendar days after receiving the initial late notice equals 15% of the unpaid deposit

Additionally, the IRS charges interest on penalties until the employment tax is paid in full. Suffice it to say, imposed fees could severely cripple any company, small- and medium-sized businesses (SMBs), in particular.

Though there’s no universally designated payroll timeline, the Fair Labor Standards Act (FLSA) requires wages to be paid on the regular payday for the pay period covered. This definition is pre-determined and agreed upon by both the employer and its employees. In addition to penalty fees, violating this regulation by missing payroll can lead to criminal investigations and litigation procedures filed on behalf of the U.S. Department of Labor for back wages, liquidated damages, and attorney fees and costs.

State employment tax penalties

There are also damages assessed for unpaid or late wages to employees on a state-by-state basis, with some imposing harsher penalties than others. For instance, in New Jersey and Massachusetts, businesses may be liable for damages triple the amount of unpaid or past due wages. Whereas, in California, smaller penalty amounts may be applied, although the threat of lawsuits under the state’s Private Attorney General Act increases an employer’s legal risk. Each state has its own laws defining a late paycheck, which makes it essential to have knowledge of changes to state and local laws and how they impact business.

Are there exceptions for good faith efforts?

For example, funds tied up in bank accounts which are temporarily inaccessible are in a strong position to avoid penalties since they were acting in good faith. This is largely different from employers who knowingly did not have enough payroll funds and allowed employees to continue working. Keep in mind, though, not all states honor good faith efforts as part of their general policies. This means penalty waivers aren’t always assured even when circumstances are beyond a company’s control.

How a PEO can help

Unforeseen problems can strike at any time. Employees want answers and business leaders need guidance they can trust. Having a backup plan can prevent further company damage if the unthinkable should happen. SMBs may have to pay with paper checks if there’s technological malfunctions or assign temporary furloughs if the cash flow isn’t there. Yet, taking time to focus on the “what ifs” can be challenging when trying to take care of business right now. Here is when working with an IRS-Certified PEO (CPEO) like ExtensisHR is beneficial.

Industry expertise

As one of the first PEOs given this industry designation, we are aligned with the highest regulatory standards by the U.S. government and the PEO financial assurance program. We also are in the 1% of PEOs who maintain ESAC accreditation, as well as Certification Institute (CI) for Workers’ Compensation and Risk Management and SOC 1 Type 2 certifications.

Expert payroll and tax administration

ExtensisHR provides a dedicated Payroll Manager to ensure payroll management is an efficient, reliable, and risk-free process. Combined with our Work Anywhere® technology platform, our solution has been designed to give businesses complete payroll functionality and reporting through a single interface. Additionally, turnkey reports are customizable for any timeframe or segment to provide the exact insights your business needs. The scope of these services include:

  • Dedicated Payroll Manager
  • Payroll Processing
  • Tax-filing and W2 Preparation
  • Garnishments
  • Work Opportunity Tax Credit Processing
  • Tax Credit Support
  • Economic/Workforce Grant Support
  • PPP Loan Forgiveness
  • HR Reporting
  • On-demand Reporting
  • Role-based Security Access
  • And more

Mobile-friendly HR software

It’s important for SMBs to work with a PEO partner who is knowledgeable and well-equipped to handle a range of HR challenges, including payroll and risk management. A PEO can help to create backup plans and alternative ways to ensure operations run effectively. In addition, with the implementation of HR technology and software, processes and communication become streamlined to make it easier to monitor and update information as needed.

High-rated service quality

Meanwhile, as experts in the field, a PEO’s role requires continuous education and analysis of updated state and federal regulations to proactively protect SMBs. At ExtensisHR, we tailor our solutions to meet each company’s unique needs, which differentiates our services from big-box PEOs. Our in-house service team delivers a 97% same-day case resolution rate, carries a Net Promoter Score of 82% (compared to the national average of 37%), and personalized support, proactive communication, and expert guidance to help SMBs stay agile and responsive in the face of uncertainty.

Missing payroll is not a situation any company wants to face. But even without unexpected emergencies, HR is already a complex undertaking. You deserve a partner you can trust for immediate expertise and support.

Our team of HR experts offer everything from payroll and benefits to compliance services and risk management, and more. To learn about how our extensive suite of services can benefit your company, contact ExtensisHR today.

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