Many employers outsource their payroll and related tax duties to third-party payers such as payroll service providers (PSPs) and reporting agents (RAs). Reputable third-party payers can help employers streamline business operations by collecting and depositing payroll taxes on the employer's behalf and filing required payroll tax returns with state and federal authorities.

Although most of these businesses provide very good service, some may not have their clients' best interests at heart. Over the past few months, a number of third-party payers around the country have been prosecuted for stealing funds intended for the payment of payroll taxes. Examples of these successful prosecutions can be found here.

Like employers who handle their own payroll duties, those who outsource this function are legally responsible for all payroll taxes due. This includes any federal income taxes withheld and the employer and employee's share of Social Security and Medicare taxes. This is true even if the employer forwards tax amounts to a PSP or RA to make the required deposits or payments. (For an overview of the different duties and obligations of agents, reporting agents, and payroll service providers, click here.

Protect Yourself

The IRS recommends that employers take these steps to protect themselves from unscrupulous third-party payers:

  • Enroll in the Electronic Federal Tax Payment System (EFTPS) and make sure your PSP or RA uses it to make tax deposits. Available free from the U.S. Department of the Treasury, the EFTPS gives employers safe, easy online access to their payment history when deposits are made under their Employer Identification Number, enabling them to monitor whether their third-party payer is properly carrying out their tax deposit responsibilities. It also gives them the option of making any missed deposits themselves, as well as paying other individual and business taxes electronically, either online or by phone. To enroll or for more information, call toll-free 800.555.4477 or click here.
  • Refrain from substituting the third-party's address for the employer's address. Although employers have the option of making or agreeing to such a change, the IRS recommends that employers continue to use their own address as the one on record with the IRS. Doing so ensures that the employer will continue to receive bills, notices, and other account-related correspondence from the IRS. It also gives employers a way to monitor the third-party payer and easily spot any improper diversion of funds.
  • Contact the IRS about any bills or notices as soon as possible. This is especially important if a bill or notice involves a payment that the employer believes was made or should have been made by a third-party payer. Call the number on the bill, write to the IRS office that sent the bill, contact the IRS business tax hotline at 800.829.4933, or visit a local IRS office. For more information, click here.
  • For employers who choose to use a reporting agent, be aware of the special rules that apply to RAs. Among other things, RAs are generally required to use EFTPS and file payroll tax returns electronically. They are also required to provide employers with a written statement detailing the employer's responsibilities, including a reminder that the employer, not the reporting agent, is still legally required to file returns and pay any tax due. This statement must be provided upon entering into a contract with the employer and at least quarterly after that. Click here for more information.