Third Party Payer Arrangements – Payroll Service Providers and Reporting Agents

Employers are responsible for withholding and paying over employment taxes and filing required returns. Many employers outsource some or all of their payroll and related tax duties to third party payers. However, employers generally remain responsible for the payment of income tax withheld and both the employer and employee portions of Social Security and Medicare taxes.

A payroll service provider (PSP) is a third party that can help an employer administer payroll and employment tax obligations. An employer may enter into an agreement with a PSP under which the employer authorizes the PSP to perform one or more of the following acts on the employer’s behalf:

• Prepare the paychecks for the employees of the employer.

• Prepare Forms 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and 941, Employer’s QUARTERLY Federal Tax Return, for the employer using the employer’s EIN.

• File Forms 940 and 941 for the employer, which are signed by the employer.

• Make federal tax deposits (FTDs) and federal tax payments for the taxes reported on the Forms 940 and 941

• Prepare Form W-3. Transmittal of Wage and Tax Statements, and file and furnish Forms W-2, Wage and Tax Statement, for the employees of the employer using the employer's EIN.

A Reporting Agent is a type of PSP. An employer may enter into an agreement with a Reporting Agent under which the employer authorizes the Reporting Agent to perform any or all of the acts that a PSP can perform. The difference is that the employer uses Form 8655, Reporting Agent Authorization, to authorize the Reporting Agent to perform these acts, and Reporting Agents may additionally sign and electronically file certain returns. A separate authorization on Form 2848, Power of Attorney and Declaration of Representative, is required for Reporting Agents to sign and file paper returns.

An employer’s use of either a PSP or a Reporting Agent does not relieve the employer of its employment tax obligations or liability for employment taxes. These types of third party payers do not assume any of the employer’s employment tax liability.

Revenue Procedure 2012-32 requires Reporting Agents to provide clients with a quarterly written statement. The written statement must advise the client that it remains responsible for the timely filing of tax returns and timely payment of employment taxes, even if the client authorizes a Reporting Agent to file returns and make payments on its behalf. The statement also includes a recommendation for the client to enroll in the Electronic Federal Tax Payment System (EFTPS) to monitor its account.

Source: IRS.gov