The Margin

What New York found when it measured payroll provider errors.

In 2022 the state’s financial regulator, working with its tax department, put numbers on a failure most employers only meet at tax time. The report is short, public, and worth reading in full. Here is what it says.

Read the DFS reportSee the measured problem

The finding.

The Department of Taxation and Finance supplied the data; the Department of Financial Services published it on September 8, 2022, under Chapter 186 of the Laws of 2022.

1Most withholding records come from providersAbout 63% of the withholding records the Tax Department receives come from a payroll service provider, and about 73% of exceptions are for taxpayers whose records came from one.
2The largest providers had the highest exception rate10% for filers whose payroll was handled by providers with 2,500 or more clients, against 5.7% for filers whose employers had no professional company filing for them, and 7.8% overall.
3Mid-size providers did better than employers on their ownProviders with 250 to 2,499 clients: 5.1%. With 25 to 249 clients: 4.8%. With 5 to 24 clients: 5.8%. With 4 or fewer: 6.3%. The problem is concentrated at the top of the market, not spread evenly across it.
4The cost lands on workersThat year the Tax Department held roughly 625,000 returns for review; it estimated from 2019 data that 75% of holds came from errors in withholding records. A held return adds 6 to 12 weeks before a refund.

What an exception is.

The report defines it precisely, and the definition matters, because it is a reconciliation failure rather than a wrong tax rate.

TriggerWho notices, and whenWhat it takes to clear
The withholding on the worker’s return differs from what the provider reported to the stateThe worker, at tax time. The report notes an employer’s own error tends to show on the paystub, while a provider’s error is often invisible until the return is filed.A Request for Information or a W-2 copy, hand verification, and a 6 to 12 week delay.
The provider’s record is missing data or has a wrong Social Security numberThe Tax Department, when it cannot validate the return.Correspondence with the taxpayer; the report notes providers can verify numbers before submitting.
The source of the error is unclearEveryone, late. The report says it is often hard to tell whether the provider or the client supplied the bad data.Reconstructing what each party knew and reported, and when.

Table paraphrases section II of the report. The report’s own words control; read it before quoting it.

The regulator’s suggestion.

Two sentences in the report describe a payroll record that does not exist yet.

1Providers could report their error rate to clientsThe Tax Department suggested that requiring providers to report their error rate, and the exception rate on returns filed by their clients’ employees, might create an incentive for accuracy, as could penalties for errors.
2Providers could verify before they fileSocial Security numbers can be checked before withholding is submitted. Missing data can be caught before the return is held rather than after.
3What Runbook takes from thisAn exception rate is a property of a payroll record, not a courtesy a provider extends. Runbook is being built so every withholding amount stays tied to the worker statement, the filing it appears on, and the deposit that settled it, with the difference between them visible before anything is filed. That is the standard; it is not yet a live capability. See current product availability.

Ask your provider for its exception rate.

If the answer is a shrug, the record cannot answer it either.

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