Whose Customer Is It? Perspectives of the Payroll Service Industry

1. Whose Customer Is It?Perspectives of the Payroll Service Industry Automatic Data Processing, Inc. ProBusiness, Inc.

2. Outline • Industry Overview • Industry issues affecting tax authorities • Industry standards project to improve accuracy and quality • Recent state projects • Changes to SSA formats for W-2 reporting • Recommendations

3. Payroll Service Industry • National Payroll Reporting Consortium • Top 12 represent over 700,000 employers • Over 1/3 of the private sector work force • Payroll tax payments & related reporting • Income Tax Withholding; W-2 reporting • Employment Security tax and wage reporting • Child Support withholding • New hire reporting

4. Payroll Service Industry: Pros and Cons • Efficient, highly automated • Largest source of electronic filing • Income tax withholding payments, W-2s • Employment Security Tax & Wage reports • New Hire Reporting • Significant edit controls • Far beyond what employers would do • E.g., formats of all state employer IDs

5. Payroll Service Industry: Pros and Cons • Prime industry issue: • Client indicative information • Significant source of certain errors . . . and staff irritation • Much can be done to improve results • Data validation programs minimize errors

6. Typical Problem Areas • Filings with no identification number • Employers in “Applied For” status (4 - 6%) • Misposting - incorrect ID or other element • Wide range of results: .03% to 8.0% • Filings for inactive accounts • “Zero” filings for live accounts that change processors with no notice

7. Reliability of Data: What Matters? • Elements required to post filings, payments • Employer identification number • Secondary ID numbers; e.g., EFT IDs • Entity name • Required deposit schedule • Required deposit method

8. Reliability of Client-supplied data • Most clients are NOT oriented to tax administration • Unsure of assigned withholding ID# • Registration for employer IDs • May occur at different times by different people - key information (e.g., name) may vary • Clients forget to tell us when an ID is assigned

9. Reliability of Client-supplied data • Reliability of Deposit Schedule Data • Often confused with payroll frequency • E.g., monthly, semiweekly etc • Most clients sign up in Fall (Oct-Dec) • Was the schedule provided this year’s or next? • May change annually or even midyear • Clients assume payroll services are notified

10. How to improve results • Implement feedback mechanisms • Prevalidate client data • So the first filing is error-free • Notify us of any errors • To avoid subsequent errors

11. How to improve results • Implement validation programs • Posting elements • Elements that vary by employer • EIN, name • Elements that change periodically • Required filing schedule or method • Provide the employer ID if missing • Reduce “Applied For” filings by 50%

12. Industry Standards Adopted • Notice of Power of Attorney • Links employers to service providers • Identifies subject matter, action requested • Functions as validation program • Basis for electronic commerce with agents • EDI T/S 157 and fixed file format

13. Industry Standard - Notice of POA • Client list reporting • SOP in many states • Manual, paper based . . . misses opportunity • Save postage and printing by suppressing unneeded tax forms • Turning point: • Link employers to service providers • Enables electronic commerce with agents

14. Industry Standards Notice of POA • Critical Link - Why & How • Most service providers handle related correspondence . . .but don’t get it directly • Establish agent ID on taxpayer database • Points to an agent database • ID, Name, address, email & contact data • Electronic copies of correspondence to agents for fast resolution

15. Industry Standards Adopted • Standard process applies to many industries • Payroll & Tax Filing Services • U.C. Claims Administrators • Employee Leasing Industry • See separate handout for explanation & proposed layout

16. EDI Issues - Minnesota Model • Key lessons learned • 2 or 3 options needed • e.g., EDI, Web-based & file transfer • Lead time for implementation • Acknowledgments a plus • Address indicative data issues • Prevalidation, ID assignments etc

17. EDI Issues - Minnesota Model • Some problems remain • Mainframe to PC is problematic • ASCII to EBCDIC & vice versa • Conversion of mainframe files; e.g., {cr} • File sizes/capacity • 13 files needed; 13 phone calls • 13 “ACK” files - coordinate to produce 1 • Can’t automate script due to delay

18. Minnesota Model • Some problems remain • Delay in update of deposit data • Final deposits need 7-10 days to post • Returns show as money due • Internet based model implemented • Lead time a problem

19. Other Illustrations • Washington Employment Security • Major format change - “de-standardized” • Convert all magnetic tapes to FTP • Security, platform, testing all issues • New Jersey Combined U.I./Revenue Filings • Lead time a problem • Changes to employer account numbers

20. New Magnetic Media Formats for W-2 Reporting will impact TY1999 • Many states accept SSA “TIB-4” Format • Format changed announced for 1999 • State (“S” record) date fields expanded • Changes entire “S” record layout • MMREF - new SSA format • Major changes to all records • Transition Years - 1999 - 2001

21. Recommendations & Incentives • Improve the current process • Electronic copies of notices • Proof of filing • Prevalidation • Delay payment and/or reporting due dates • Revenue neutral • Use Standards; i.e., ANSI X12/TIGERS

22. Recommendations • Improve information dissemination • Websites are VERY helpful • Announcements of changes • Consider how changes may impact your most highly automated clients • Let us know of major changes early • NPRC can help assess impact, plan and communicate

23. Perspectives on Electronic Filing National Payroll Reporting Consortium Automatic Data Processing, IncPeter Isberg (973) 974-5779 Pete_Isberg@ES.ADP.COM ProBusiness, Inc Andrew McDevitt (925) 737-3196 amcdevitt@probusiness.com