State Tax Accounts Cause Logistical Hurdles for Payroll

State online tax portals can create compliance challenges for payroll professionals if their company’s tax accounts are not properly managed, a payroll tax consultant said May 12.

Problems can arise even before a business registers itself through a state’s online tax portal, said Michael Orton, managing director for Experian Employer Services. Companies must generally register before employees are hired and paid in the state, but payroll teams often don’t know when employees are hired, he said. By the time these employees are paid, the registration process, which can take weeks, might be incomplete, he added. This can result in tax complications, especially if the delayed registration occurs over separate calendar quarters or tax years, he said.

Payroll professionals should develop internal processes to know when their company is expanding into other states, he said. Payroll teams should work with their human resources counterparts to get timely new-hire notifications, he said. For employees who work from home, the payroll team can audit employee addresses to ensure that they are in states where the company has already registered, Orton added.

“This is a coordination effort,” he said. “We’re talking payroll tax here, but there’s sales tax, property tax, income tax, secretary of state filings, so there’s a huge undertaking when a company’s geographically expanding.”

Michael Orton spoke at PayrollOrg’s 44th Payroll Congress in Nashville, Tennessee.

Closing an old state tax account is just as important as opening one, he said. If a company stops paying tax without closing its account, the state might issue a blind assessment, which is an estimated tax liability based on the company’s historical tax payments, he said. The state makes the assessment assuming that the company made a mistake and should still be paying taxes, he explained.

“If not handled properly, this will continue to haunt you over time until you finally [close the account],” he warned.

States will not let businesses close their accounts if there are missing tax returns or tax payments, Orton said. The business must address any outstanding issues on the account before the state allows it to close, he said.

Determining what issues might exist on an account is a separate challenge for businesses and payroll because many state online tax portals are difficult to use, he said. Due to the large number of state tax accounts that a large business might have, login information can get lost, account contact information might be outdated, and some payroll professionals might not be able to access their company’s account if they are not listed as authorized users, he explained.

Furthermore, if the payroll professional responsible for managing a company’s account resigns or retires, the rest of the payroll team could have difficulty logging into the state tax portal, especially if the login process requires multifactor authentication, Orton said. In that case, the company might not know how to contact the state to resolve the issue, since many states require communication to occur through their tax portal.

“Online [tax] portals might be the most revolutionary thing that’s happened to payroll in the last 15 years. You used to not be able to log in to a portal and see all your filing and payment history,” he said. “This is the greatest tool we’ve been given in the last 20 years, which a lot of people are not using.”

Orton recommended a “hard reset” to payroll teams trying to keep on top of their company’s state tax accounts. A hard reset first involves ensuring that the team has access to all relevant state tax accounts and then developing a guide for managing login credentials, updating account contact information, and keeping track of authorized users, he said.

“There are things that can be done,” he said. “We’re going to have to figure out as a community how to do this better because states are leaning more and more this way over time.”