Payroll outsourcing services described

Some assume liability for taxes and/or responsibility for returns.
By Paul Bonner

In Fact Sheet FS-2020-12, the IRS explained the major differences between five types of third-party providers of payroll services:

  • Payroll service providers assist employers in administering payroll and employment tax obligations. They typically prepare paychecks, make tax deposits and payments, and file related returns and tax forms. However, payroll service providers do not assume or relieve the employer of liability for employment tax obligations or responsibility for filing returns and forms.
  • Reporting agents are a type of payroll service provider that file an authorization with the IRS signed by the employer client that allows them to electronically submit forms and deposit taxes and to correspond with the IRS on the client's behalf. Like other payroll service providers, however, reporting agents do not assume tax liabilities or responsibility for other employment tax obligations.
  • Sec. 3504 agents assume liability along with the employer for payroll tax withholding responsibility and liability for unpaid taxes. Authorized under Sec. 3504, they are appointed by the employer to withhold, report, and pay employment taxes with respect to wages they pay on behalf of the employer, as well as on their own employees. Appointed by the employer using Form 2678, Employer/Payer Appointment of Agent, they can file aggregate returns for multiple employers using the agent's own employer identification number (EIN).
  • Professional employer organizations perform some or all of the employment tax withholding, reporting, and payment related to workers performing services for the organization's client. They may represent themselves as the employer or co-employer of clients' employees. However, tax liability and filing responsibility is determined under the Code and regulations, and the IRS is not bound by any agreement between an employer and a third party.
  • Certified professional employer organizations are professional employer organizations certified by the IRS under Sec. 7705 to perform withholding, reporting, and payment responsibilities relating to wages they pay to workers performing services for their clients. Like Sec. 3504 agents, they file aggregate returns using their own EIN. They are generally solely liable for depositing and paying employment taxes and filing associated returns for "work site employees" as defined by Sec. 7705(e).

The fact sheet also provides links to other IRS resources, including a chart summarizing some of these key features, available at .irs.gov.

  • Fact Sheet FS-2020-12

— By Paul Bonner, a JofA senior editor.

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