2008 Review of W-2/1099 Compliance Programs

From the Oct. 2008 Issue

In our August 2008 issue, we reviewed payroll systems (www.CPATechAdvisor.com/go/2080) that are geared toward professionals who provide payroll services to their clients. The relationship between professional accountants and payroll processing is a peculiar one, to say the least. For many years, firms found the offering valuable, but then the national processing companies entered and virtually swallowed the entire market.

But since many clients prefer to deal with a live person instead of a phone, fax or computer, many started coming back to their accountants for the service. And this makes sense since accountants are generally the most trusted business advisor a small business owner has. The professional already has a relationship with the entrepreneurs or management, and the firm is often already managing many of the compliance and accounting issues for the business. Add these factors to the reality that most business owners just don’t want to do their own payroll, and you’ve got a perfect fit, whether the firm opts to provide the service after-the-fact or live.

Still, there are many professional practices that prefer to stay away from payroll, and many clients who keep the task in-house. And while these clients may keep up with the routine tasks associated with payroll, such as managing withholding liabilities, paying third parties and other issues, they often aren’t prepared for the year-end compliance functions, so once again, they turn to their accountant.

Key among these functions, of course, are preparing forms W-2, 1099 and 1098 for employees or other recipients, as well as forms W-3, 1096 and 5498. While many full payroll programs include capabilities for wage reporting issues, few offer 1099 and 1098 options or tools to meet annual compliance for these forms. Even very small businesses can be required to produce hundreds or more of these forms, and the penalties can be considerable, so finding a compliance solution is necessary. While numbers were not yet available breaking down the small business contribution, according to the IRS, more than 1.8 billion information returns were filed in TY 2007. Talk about a mountain. But thanks to advances and mandates related to e-filing, 1.1 billion of these were filed electronically.

Fortunately, several technology vendors have developed specialty programs focused almost exclusively on preparing W-2s, 1099s, 1098s and their related reports. While the tasks aren’t necessarily related during business processes, they come together at the end of the year when they need to be sent to the IRS and SSA, so it is intuitive for these programs to handle both projects. Most of these systems are from smaller vendors, but many have been on the market for decades. Some larger accounting and payroll providers are starting to see the potential market, however, and are adding modules to address these needs.

Each of the programs here approaches these year-end tasks in different ways and provides varying reporting tools and specific form support, often related to the depth of the payroll capabilities within the system. They also vary in their support for state filings, but all of them now offer electronic filing of year-end information returns, a requirement by the IRS and SSA for filers with more than 250 such returns.

Annual information return reporting is one of the biggest challenges of payroll, especially for small business owners who may not know the requirements and potential pitfalls. So these businesses will, for the foreseeable future, continue to rely on their accountant for these services, and accountants will continue to need a specialty W-2/1099 preparation program.