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Issue Number: Tax Tip 2023-65
Picking the right third-party payroll service provider helps protect businesses
Not all third-party payroll service providers are created equal. A trusted, qualified company can help keep businesses secure and tax compliant. An unreliable or fraudulent company can lead to missed deposits, theft or returns not being filed.
While many third-party payroll service providers give quality service, unprofessional or fraudulent companies will take the money and run – accepting a customer’s payroll taxes and closing without warning. This is costly for the affected business because it’s legally responsible for reporting and paying the taxes due, even if it sent funds to the third-party payroll service provider for required deposits and payments.
Businesses can protect themselves by hiring a one of these 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 at IRS.gov.
- 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.
The IRS encourages employers to enroll in EFTPS and make sure its third-party payroll service provider uses EFTPS to make tax deposits. It’s free and it gives employers safe and easy online access to their payment history for deposits made with their EIN. This helps them monitor whether their third-party payroll service provider meets its tax deposit responsibilities.
Employers should contact the IRS about any bills or notices they receive, especially if the bill or notice relates to payments managed by a third party. Call the number on the bill, write to the IRS office that sent the bill or contact the IRS business tax hotline at 800-829-4933.
Outsourcing Payroll and Third-Party Payers
Third Party Arrangement Chart
CPEO Customers – What You Need to Know
Reporting Agents File
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