Payroll Solutions: Thinking of Hiring a Third Party Payer?

My client base is full of good business men and women who work long hours to produce a superior product or service. They often tell me it is a team of quality employees that make it possible to be successful. When the Eagle flies on Friday they want to get paid. So you pay them.

Payroll processing can become the linchpin which causes  expensive/time consuming problems for the owner of a company. It is often in their best interest to hire an outside company to prepare payroll and payroll reports. Her is a bit you need to know.

An employer may outsource some or all of its federal employment tax withholding, reporting and payment obligations. An employer who outsources payroll and related tax duties (that is, withholding, reporting, and paying over social security, Medicare, FUTA, and income taxes) to a third party payer, generally will remain responsible for those duties, including liability for the taxes.

If an employer outsources some or all of its payroll responsibilities, the employer should consider the following information.

The employer remains responsible for federal tax deposits and other federal tax payments even though the employer may forward the tax amounts to the third party payer to make the deposits and payments. If the third party fails to make the deposits and payments, the IRS may assess penalties and interest on the employer’s account. As the employer, you may be liable for all taxes, penalties, and interest due. The employer may also be held personally liable for certain unpaid federal taxes.

 If the employer’s account has any issues, the IRS will send correspondence to the employer at the address of record. We strongly recommend that the employer maintain its address as the address of record with the IRS. Having correspondence sent to the address of the third party payer may significantly limit the employer’s ability to be informed about tax matters involving the employer’s business.

The following are common third party payers who an employer may contract with to perform payroll and related tax duties.

Payroll service provider (PSP).

Reporting agent.

Agent with approved IRS Form 2678.

Payer designated under section 3504.

Certified Professional Employer Organization.

Payroll service provider (PSP). A PSP helps administer payroll and payroll related tax duties on behalf of the employer. A PSP may prepare paychecks for employees, prepare and file employment tax returns, prepare Form W-2, and make federal tax deposits and other federal tax payments. A PSP performs these functions using the EIN of the employer. A PSP isn’t liable as either an employer or an agent of the employer for the employer’s employment taxes. If an employer is using a PSP to perform its tax duties, the employer remains liable for its employment tax obligations, including liability for employment taxes.

An employer who uses a PSP should ensure the PSP is using Electronic Federal Tax Payment System® tax payment service or EFTPS to make federal tax deposits on behalf of the employer so the employer can confirm that the payments are being made on its behalf.

Reporting agent. A reporting agent is a type of PSP. A reporting agent helps administer payroll and payroll related tax duties on behalf of the employer, including authorization to electronically sign and file forms set forth on IRS Form 8655. An employer uses Form 8655 to authorize a reporting agent to perform functions on behalf of the employer. A reporting agent performs these functions using the EIN of the employer. A reporting agent isn’t liable as either an employer or an agent of the employer for the employer’s employment taxes. If an employer is using a reporting agent to perform its tax duties, the employer remains liable for its employment obligations, including liability for employment taxes.

A reporting agent must use EFTPS to make federal tax deposits on behalf of an employer. The employer has access to EFTPS to confirm federal tax deposits were made on its behalf.

 

Agent with an approved IRS Form 2678. An agent with an approved IRS Form 2678 helps administer payroll and related tax duties on behalf of the employer. An agent authorized (under section 3504) may pay wages or compensation to some or all of the employees of an employer, prepare and file employment tax returns as set forth on Form 2678, prepare Form W-2, and make federal tax deposits and other federal tax payments. An employer uses Form 2678 to request authorization to appoint an agent to perform functions on behalf of the employer. An agent with an approved Form 2678 is authorized to perform these functions using its own EIN. The agent files a IRS Schedule R (Form 941) to allocate wages and taxes to the employers it represents as an agent.

If an employer is using an agent with an approved Form 2678 to perform its tax duties, the agent and the employer are jointly liable for the employment taxes and related tax duties for which the agent is authorized to perform.

Form 2678 doesn’t apply to FUTA taxes reportable on IRS Form 940 unless the employer is a home care service recipient receiving home care services through a program administered by a federal, state, or local government agency.

Payer designated under section 3504. In certain circumstances, the IRS may designate a third party payer to perform the acts of an employer. The IRS will designate a third party payer on behalf of an employer if the third party has a service agreement with the employer. A service agreement is an agreement between the third party payer and an employer in which the third party payer (1) asserts it is the employer of individuals performing services for the employer; (2) pays wages to the individuals that perform services for the employer; and (3) assumes responsibility to withhold, report, and pay federal employment taxes for the wages it pays to the individuals that perform services for the employer.

A payer designated under section 3504 performs tax duties under the service agreement using its own EIN. If the IRS designates a third party payer under section 3504, the designated payer and the employer are jointly liable for the employment taxes and related tax duties for which the third party payer is designated.

The good news here is you only need to be familiar with the rules governing the particular third party arrangements. When a business owner is facing payroll related issues with the IRS the first step to removing the problem going forward is to make that connection with a reputable payroll processor that will allow you to do what it is you do best: Grow and Manage you company.

New Life Tax Resolution is built on the foundation of our Core Values, including commitment, trust and respect for our clients.

Our company is uniquely poised to help with a variety of  Payroll issues, back taxes, audits, liens and levies, and other issues.  It is possible to be free and clear of looming IRS issues. To see what programs, you may qualify for CLICK HERE.  If you are a phone person, you can call New Life Tax Resolution today at 407-287-6638 to set up a case review.

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About Patrick LeClaire

After 15 years in corporate finance and Tax Preparation, I formed a company as an Enrolled Agent. I insist on superior customer service and the highest standards available as I embark on a journey to resolve one case at a time at New Life Tax Resolution.