Many organizations are choosing to say “so-long” to manual withholding processes to gain operational efficiencies allowing finance and accounting teams to focus on business critical tasks rather than repetitive tasks with limited value-add to the organization. In addition, eliminating manual withholding processes can mitigate process, compliance and security risk associated with managing multiple spreadsheets used at varying steps throughout the withholding process.
Hidden costs to manual withholding processes can add up, but because costs can be difficult to determine they are easy to overlook. To help you, below are six hidden costs to manual withholding processes your organization should be considering, along with metrics to quantify associated costs to your organization.
Remittances (Payments) – Payments to recipients, states and federal governments often occur at different times depending on payment frequencies, thresholds and requirements, making it difficult for accounting and finance professionals to manage payment calendars manually. Government agencies can also have varying portals for different types of withholding, requiring additional portals to navigate and likely increases average processing times per remittance. The process of remitting manually is very time consuming and can increase like likelihood of manual errors occurring. Here are suggested metrics to help you understand your hidden costs associated with remittance processing:
- # IRS and state remittances made daily and annually
- % remittances made to IRS vs. states
- # remittances reported for each withholding type annually
- IRA, Backup, Non-Resident Alien, or FATCA withholding
- $ remitted to the IRS and states daily and annually
- # hours spent on remittances annually
- Average processing time per remittance
- # resources contributing to remittance process
- $ IRS and state penalty risks (see compliance risk section for more information)
Reporting – All reporting is handled according to the appropriate regulatory schedule for each jurisdiction, typically quarterly and annually. IRS requires annual withholding reporting to be reported on Form 945, 941 or 1042, but states can implement their own withholding reporting requirements on their own schedule and in their own format. States that deviate from federal reporting schedules typically require quarterly reporting forcing organizations to reconcile remittances, withholding reporting and 1099 reporting more frequently taking resources away from business critical tasks. The more states an organization has withholding reporting requirements for, the more complex the process is and allows room for more errors to occur. Some metrics you can use to measure your hidden costs for withholding reporting are:
- # IRS and state withholding filings completed annually
- % filings reported to IRS vs. states
- # unique state reporting formats
- # hours spent preparing and completing IRS and state filings annually
- # resources contributing to withholding reporting
Reconciliation – Organizations should be conducting quarterly and annual reconciliations on remittances, withholding reporting and 1099 reporting processes at state and federal levels to ensure there are no discrepancies on withholding payment amounts and amounts reported to recipients and government entities. Manual reconciliation processes to find discrepancies is very time-intensive and can often lead to unreconciled transactions due to not being able to easily identify the source of the discrepancy. This can lead to resources time being used inefficiently and ineffectively, rather than being used in strategic means. Unreconciled withholding payments and reporting can also lead to audits and penalties, especially under enhanced IRS and state enforcement. The following are metrics that can be used to help identify hidden costs associated with withholding reconciliation processes:
- # hours spent reconciling remittances, withholding reporting and 1099 reporting information
- $ unreconciled remittances, withholding reporting and 1099 reporting
- # resources contributing to reconciliation process
- $ penalty for reconciliation issues
Compliance Risk – As internal resources are deployed to manually research state and federal agency withholding requirements and updates related to filing guidelines, frequencies and regulatory requirements, the compliance risk associated with missing a regulatory update or making a late payment puts organizations at risk for non-compliance. Non-compliance often results in audits and penalties, especially under increased scrutiny and the threat of more stringent enforcement. In addition, manual processes alone are more prone to error, which could easily trigger unreconciled records. Below are suggested metrics on how to measure compliance risk for your organization as it relates to manual withholding processes:
- # hours spent researching state and federal compliance requirements and updates
- $ annual state and IRS penalties annually
- $ IRS late penalty risk
- 1-5 days late = 2% x average IRS daily remittance amount
- 6-15 days late = 5% x average IRS daily remittance amount
- 16+ days late = 10% x average IRS daily remittance amount
- $ state late penalty risk
- % (days late) x average state daily remittance amount
- # hours spent on audit preparation, audit execution and penalty abatement
- # resources contributing to compliance research and penalty abatement process
Process Risk – The process of remitting, reporting and reconciling withholding is primarily conducted through various forms of process documentation, spreadsheets and a few key internal resources. Utilizing a few key resources to conduct manual, mundane processes poses process risk as resources decide to leave the organization or are absent long term. When resources who were conducting manual processes are lost, organizations typically incur costs associated with onboarding and training new employees along with costs associated with lost knowledge. Given the current low unemployment rates, organizations should also reduce repetitive processes to appear more attractive to current and future employees who prefer to be utilized in more strategic means. Managerial oversight is also challenging since much of the process is manual or fragmented. Some metrics your organization can use to understand your process risk associated with manual withholding processes are:
- # resources contributing to any part of withholding process
- # hours spent by each resource on any part of withholding process
- % of each resources time dedicated to any part of withholding process
- % employee turnover rate
- Average ramp period for new employees
Security Risk – Managing the entire withholding process manually through various forms of documentation and spreadsheets makes it difficult for organizations to secure and lock down documents or information to specific key resources. In addition, the information within the spreadsheet can be easily shared with others through various channels with limited visibility. Manual withholding processes also do not have full audit trail history to have full insight into payments made and records reported. To gain a better understanding of your organization’s security risk, here are a couple suggested metrics:
- # spreadsheets used for remittances and withholding reporting
- # spreadsheets used for 1099 reporting
- # documents tracking compliance requirements and updates
- # login and payment credentials stored in documents
- $ storage costs associated with storing paperwork and documentation
Take Action
Get in touch with industry experts on tax information reporting and withholding, or find out more about how Sovos facilitates withholding management and 1099 reporting.
