Outsourcing payroll and third-party payers

Employer's outsourcing payroll responsibilities

Many employers outsource some of their payroll and related tax duties to third-party payroll service providers. They can help assure filing deadlines and deposit requirements are met and greatly streamline business operations. But remember, employers are ultimately responsible for the payment of income tax withheld and both the employer and employee portions of social security and Medicare taxes (though in certain situations employers who are customers of a Certified Professional Employer Organization are relieved of their liability for income tax withholding and social security and Medicare taxes).

Third party arrangements

Employers may designate or enter into an agreement with a third party in which the third party agrees to take over some or all of the employer’s Federal employment tax withholding, reporting and payment responsibilities and obligations. The following common third party arrangements are discussed in this section:

• Payroll Service Provider (PSP)
• Reporting Agent (RAF)
• Section 3504 Agent
• Certified Professional Employer Organization (CPEO)

Depending on the facts and circumstances, and the type of third-party arrangement, an employer who uses a third party to perform Federal employment tax functions on its behalf may remain solely liable for Federal employment taxes, may become jointly and severally liable for such taxes or may be relieved of liability for such taxes.

Third party arrangement chart

The attached chart illustrates some differences in authority between a payroll service provider, reporting agent authorized using Form 8655, Reporting Agent Authorization PDF, an agent appointed using Form 2678, Employer/Payer Appointment of Agent PDF and a CPEO identified using Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement PDF.

Payroll service provider not making federal tax deposits?

Many employers outsource some or all payroll duties to third-party payroll service providers (PSP). These providers help ensure compliance with the IRS filing and deposit requirements. In the event of default by a third party, the employer remains responsible for the deposit of the federal tax liabilities and timely filing of returns.

If you suspect your payroll service provider of improper or fraudulent activities involving the deposit of your federal taxes or the filing of your returns, you can file a complaint using Form 14157, Complaint: Tax Return Preparer PDF. The IRS has streamlined the process to file Form 14157. You can mail the form, or fax it to 855-889-7957. Once received, the PSP-identified complaints will receive expedited handling and investigation.

Reporting Agents (RA)

General information

Reporting Agents have long served an important role in our nation's tax collection system as a conduit between employers and the IRS. Reporting Agents improve the efficiency of IRS tax collection and compliance. Reporting Agents assist employers in making required tax deposits and tax information filings to the federal government and to state and local governments.

Aggregate filers

Aggregate Form 941 and Form 940 filers must use Schedule R

IRC section 3504 agents and CPEOs must use the Schedule R for Form 941 and the Schedule R for Form 940 to provide an allocation of aggregated wages, employment taxes and deposits for their clients.

TIN matching service

Taxpayer Identification Number (TIN) Matching

TIN matching is part of a suite of Internet based pre-filing e-services that allow "authorized payers" the opportunity to match 1099 payee information against IRS records prior to filing information returns. This service may assist in improving the accuracy of Form 1099 data, and reduce subsequent penalties and error notices. E-services users must register to have access to products such as TIN Matching. To get started using TIN Matching, please visit our e-services.