Last Updated: December 7, 2021
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.
The third party usually takes care of:
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.
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 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.
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.
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:
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.
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:
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.
Know the risks of using a third party to handle employment taxes.
The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers and protects taxpayers’ rights. We can offer you help if your tax problem is causing a financial difficulty, you’ve tried and been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure just isn’t working as it should. If you qualify for our assistance, which is always free, we will do everything possible to help you.
Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778.
Low Income Taxpayer Clinics (LITCs) are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, see the LITC page on the TAS website or Publication 4134, Low Income Taxpayer Clinic List.