How to Create Risk Management Guidelines for your Business

Written by: Summer E. Poletti, Cachet Director of Client Relations

With recent IRS legislation now holding third party processors personally accountable for remittance of clients’ payroll tax dollars, establishing and maintaining proper risk management policies is now more important than ever. For details, see our previous blog post blog.payrolltaxmgmt.com/blog/83dfa1bb-f52f-4415-8574-3e60d79a94c0/third-party-payers-could-hold-liability-tfrp-for-non-payment-of-payroll-taxes

Every business model will differ slightly even in our tight-knit industry. First, think about some key factors related to risk.

Consider your niche market. The first step in creating Risk Management guidelines for your company is to assess your potential risk. Do you specialize in a certain sector of the market, such as restaurant payrolls? You need to understand the potential risk of any niche market in which you specialize. Restaurants are notoriously bad at cash-flow management and far more likely to NSF. Understanding your potential risk as it relates to your niche market will help you create a plan that works for your business.

Consider your "selling factor". You already know what sets you apart from the "Big Box" payroll processors; think about how your marketing techniques may affect your potential risk. Do you allow many of your clients to process next-day or same-day payrolls? If so, that is much riskier than processing most of your clients' payrolls two or three days prior to check date.

Consider the policies of your bank or ACH processor.  Timing is of the essence when it comes to items that put your business at risk. Look at your bank or ACH processor's policies and tailor your risk management policies accordingly -- How soon are they notifying you of a client NSF? Do they give you the ability to suspend or reverse files?

Consider the capabilities of your tax compliance software. You may be able to offset risk by holding payroll tax deposits in the event of a client NSF. It is important to know the capabilities of your system in order to set your risk management policies. Does your system automatically track $100k payrolls? Does your system allow you to place clients on hold for NSFs? Does your system automatically hold payroll tax deposits if funds have not been received?

Once you have taken into consideration all factors that will contribute to your potential risk and your ability to control it; you need to establish written guidelines that are published, known, and practiced by all employees.

Know Your Client. You should consider steps to ensure you do not take on any "clients" tat are fraudulent companies, "payroll jumpers", or companies that are financially unstable. Consider running credit checks on new clients, visiting their offices, calling to obtain references from other vendors with which they process, calling their former payroll service bureau, etc.

Establish procedures for next-day and same-day payrolls. To stay competitive, you need to be in a position to offer next-day and same-day processing. Consider requiring these clients to wire funds to you. If your ACH processor has the capability, Drawdown FedWire (reverse wire) may also be a good choice.

Establish procedures for client NSFs. Your procedures should help ensure that you recover the funds as soon as possible. The procedures should include escalating NSF fees, procedures for holding or reversing payroll tax deposits, procedures on when to terminate a client for NSF activity, etc. Follow your procedures to the letter and don't fall into the "he's good for it" trap. Do not let your clients put your business at risk by soliciting unsecured loans!

Reconcile Daily. Make sure you are reconciling your accounts, especially your tax impound account, down to the FEIN (client) level, on a daily basis.

Consider contracting a risk management expert. You can limit your risk by contracting with a trusted partner, allowing you to focus on your core product -- payroll. A service like PTM's FlexTax, gives you the control you desire in an in-house tax processing system, but with all the checks and balances you get with traditional payroll tax outsourcing solutions.

Whichever way you go, make sure you establish risk management policies, and that you review and revise them no less frequently than annually. Make it a point to read articles on industry trends and adjust your business policies as needed.