In a May 10 “Tax Tip,” the IRS is stressing to employers the importance of selecting a trusted third-party payroll service provider to keep the business secure and tax compliant (IRS Tax Tip 2023-65, 05/10/2023).
According to the IRS, a payroll service provider (PSP) is a third party that can help an employer administer payroll and employment tax obligations. An employer may enter into an agreement with a PSP under which the employer authorizes the PSP to perform one or more of the following acts on the employer’s behalf:
- Prepare the paychecks for the employees of the employer.
- Prepare Forms 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and 941, Employer’s Quarterly Federal Tax Return, for the employer using the employer’s EIN.
- File Forms 940 and 941 for the employer, which are signed by the employer.
- Make federal tax deposits (FTDs) and federal tax payments for the taxes reported on the Forms 940 and 941.
- Prepare Form W-3, Transmittal of Wage and Tax Statements, and file and furnish Forms W-2, Wage and Tax Statement, for the employees of the employer using the employer’s EIN.
The IRS explains that “not all third-party payroll service providers are created equal.” Many PSPs provide quality service, however, unprofessional or fraudulent companies do exist. This can be costly to an employer as it remains legally responsible for reporting and paying the taxes due, even if the employer sent funds to the PSP for required federal payroll tax deposits and payments.
The IRS notes that there are ways for employers to protect themselves by hiring one of the following trusted providers:
- Certified professional employer organization. Generally, these organizations are solely liable to file employment tax returns and make deposits and payments for the taxes their customers report for wages and other compensation. CPEOs file employment tax returns and deposits and pay their customers’ combined tax liabilities with the CPEO’s Employer Identification number. An employer enters into a service contract with a CPEO and the CPEO submits to the IRS Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement. Employers can find a CPEO on Public Listings on the IRS website.
- Reporting agent. This is a third-party payroll service provider that must deposit a customer’s taxes with the Electronic Federal Tax Payment System. Reporting agents generally can share customers’ information with the IRS to resolve issues. They must also provide customers with a written statement reminding them that the employer, not the reporting agent, is responsible for filing tax returns and paying taxes on time. To inform the IRS of its relationship with a customer, reporting agents submit Form 8655, Reporting Agent Authorization, which the customer signs.
- Section 3504 agent. This third-party payroll service provider withholds, reports and pays employment taxes for the employer. A section 3504 agent assumes liability along with the employer for the employer’s Social Security, Medicare and federal income tax withholding responsibilities. The agent combines all the returns for its employer customers and submits them with the agent’s EIN. Generally, employers who use a section 3504 agent must still file FUTA tax returns with their own EINs. To request the IRS to authorize a third party as an agent of the employer, the employer submits Form 2678, Employer/Payer Appointment of Agent.
For additional steps to make sure payroll tax deposits are accurately and timely, the IRS encourages employers to enroll in EFTPS and make sure its third-party payroll service provider uses EFTPS to make tax deposits. EFTPS is free and it gives employers safe and easy online access to their payment history for deposits made with their EIN. As a result, employers can monitor whether the PSP has met the employer’s tax deposit responsibilities.
The IRS has a dedicated phone number (800-829-4933) for employers to call about any bills or notices that they receive, especially if the bill or notice relates to payments managed by a PSP.
For more information on employers outsourcing payroll tax responsibilities, see Payroll Guide ¶4299.
Get all the latest tax, accounting, audit, and corporate finance news with Checkpoint Edge. Sign up for a free 7-day trial today.
