Third Party Arrangements For Employment Taxes

Some employers hire a third party, sometimes called a payroll service provider, to help them meet some or all their employer federal employment tax obligations.

What do I need to know?

The third party usually takes care of:

Administering payroll and employment taxes on behalf of the employer; and
Reporting, collecting, and depositing employment taxes with state and federal authorities.

If you’re using a third party, it’s important to understand what types of payroll tasks third parties can do. It’s critical to remember that hiring a third party doesn’t relieve you, the employer, of your employment tax filing, deposit, and payment obligations.

There are several common third-party arrangements for employment taxes.

Payroll Service Providers and Reporting Agents

Payroll Service Providers (PSPs) help an employer administer payroll and employment taxes. PSPs often prepare employment tax returns for signature by employers/clients. They pay the associated taxes using the client’s Employer Identification Number (EIN) and the client’s funds.

Reporting Agents authorized under IRS Form 8655, Reporting Agent Authorization, typically sign and file the client’s returns electronically using each client’s EIN. They pay employment taxes and make federal tax deposits through the IRS’s Electronic Federal Tax Payment System (EFTPS).

Aggregate Filers and Professional Employer Organizations

Aggregate Filers appointed by an employer on IRS Form 2678, Employer/Payer Appointment of Agent, assume liability along with the employer for the employer’s Social Security, Medicare, and federal income tax withholding. They file aggregate returns (e-file or paper) using the agent’s EIN.

Professional Employer Organizations (PEOs), sometimes referred to as employee leasing companies or temporary staffing services, enter into agreements with a client to withhold, report, and pay employment taxes for the workers performing services for the client. A PEO files employment tax returns in its own name and EIN. Regardless of the terms of the agreement between a client and a PEO, the client remains the employer and is responsible for withholding, reporting, and paying employment taxes.

Actions

What should I do?

Third parties perform an important service by ensuring that their clients meet filing deadlines, deposit requirements, and payment due dates. However, using a third party doesn’t relieve you, the employer, of your employment tax filing, deposit, and payment obligations.

Protect your business from tax liabilities caused by a third-party failure

Prevent unauthorized changes of address. A dishonest third party might change your address of record with the IRS to its own address, without your knowledge or consent, to keep you from receiving IRS notices about problems with your account. The law now requires the IRS to send a confirmation of address change to both the employer’s new address and its former address.

To prevent problems:

Don’t change your address of record to the third party’s address. This can keep you from finding out about tax matters involving your business. Problems often arise when businesses rely solely on the third party to keep them informed of the status of tax deposits and payments.
If you find out your address was changed without your authorization, notify the IRS immediately by calling the number on the letter or bill you receive, writing to the IRS office that sent it, or visiting a local IRS office. If you can’t find your letter or bill, you can call the IRS Business Assistance Line at 800-829-4933.

If you’re concerned that something has happened, call the Business Assistance Line at 800-829-4933 to find out if your business has any unfiled returns, or overdue deposits or payments.

Be sure your third party uses the Electronic Federal Tax Payment System (EFTPS). EFTPS automatically issues Inquiry PINs to the clients of payroll service providers. This gives you access to the EFTPS account to verify the provider is making timely, accurate deposits and payments for you. You can and should investigate to correct missing or late payments immediately. Once the payroll service provider has your money, there’s no reason it shouldn’t be paid to the IRS.

If you didn’t receive a letter about your Inquiry PIN, you can register on EFTPS to get your PIN and verify payments. When you register, you’ll have online access to 16 months of payment history.

If you’re a victim of a third party payroll tax return preparer

The law now requires the IRS to give special consideration to an offer in compromise from a taxpayer who has been defrauded by a third-party payroll tax return preparer. This is called an Effective Tax Administration (ETA) offer. It may allow you to settle your debt for less than the full amount due, even if you have assets that could pay the balance created by the third party’s actions.

During your first contact with the IRS:

Indicate that your business is a victim of nonpayment by a third-party payroll tax return preparer.
Discuss an offer in compromise as an alternative to IRS collection action.
Ask the revenue officer not to assert the trust fund recovery penalty.

If employment tax payments are used in any other way than paying the tax, the IRS would normally assess this penalty. Because the funds were lost to fraud, in which you played no part, you shouldn’t be responsible for the penalty.

How will this affect me?

Know the risks of using a third party to handle employment taxes.

When a third-party goes out of business or misuses clients’ funds, the employers remain liable for the unpaid taxes.
A third party failure can seriously harm clients. They may be required to pay the amount of employment taxes twice: once to the third party and again to the IRS with interest and penalties.
A business that can’t recover from these setbacks may be forced to stop operations.

Wait, I still need help.

If your IRS problem is causing you financial hardship, you’ve tried repeatedly and aren’t receiving a response from the IRS, or you feel your taxpayer rights aren’t being respected, consider contacting the Taxpayer Advocate Service (TAS).

Browse common tax issues and situations at Get Help.

You may be eligible for representation from an attorney, Certified Public Accountant (CPA), or Enrolled Agent (EA) associated with a Low Income Taxpayer Clinic (LITC) for little or no cost. Low Income Taxpayer Clinics also provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language.

Resources

Third Party Arrangement Chart

See the Chart

Outsourcing Payroll and Third Party Payers

Electronic Federal Tax Payment System

Electronic Federal Tax Payment System (EFTPS)