Do you use a payroll service provider? If so, what type of provider?
Do you know your employment tax responsibilities? The answer might surprise you.
Employers are required to withhold federal income and social security taxes from the wages of their employees. These withholding taxes are held by the employer in a trust fund (and are commonly called “trust fund taxes”) for the U.S. government. In general, The IRS imposes a penalty on a person that is required to, but does not, pay trust fund taxes to the IRS. This is commonly referred to as the trust fund recovery penalty (TFRP). Many employers outsource some or all of their trust fund tax and related filing duties to third parties (“third-party providers”). The IRS notes that employers should know that, depending upon what type of third party they hire, the employer may still be liable for the TFRP if the third party does not pay the trust fund taxes to the IRS.
Below is a list of different types of third-party providers and their liability:
Payroll Service Provider. A payroll service provider (PSP) is a third party that can help an employer administer payroll and trust fund tax obligations. An employer’s use of a PSP does not relieve the employer of its trust fund tax obligations or potential liability for the TFRP. This type of third party does not assume any of the employer’s trust fund tax liability. The employer, not the PSP, remains liable for ensuring all tax returns are filed timely and all deposits and payments are made timely.
Reporting Agent. A reporting agent (RA) is similar to a PSP but has informed the IRS of its relationship with its client (via Form 8655, Reporting Agent Authorization, which is signed by the client). An employer may enter into an agreement with a RA where the employer authorizes the RA to perform any or all of the acts that a PSP can perform.
Differences between a RA and a PSP include that the RA is generally required to electronically submit any returns it files on behalf of its client and to electronically deposit its client’s taxes. In addition, an RA is authorized to exchange information with IRS on behalf of its client, such as to resolve an issue.
As is the case with PSPs, an employer’s use of a reporting agent does not relieve the employer of its trust fund tax obligations. A reporting agent does not assume any of the employer’s trust fund tax liability. The employer, not the RA, remains liable for ensuring all tax returns are filed timely and all deposits and payments are made timely.
Section 3504 Agent. An employer may appoint a Section 3504 agent to perform acts such as the withholding, reporting and paying of federal trust fund taxes with regard to wages paid by the agent for the employer, as well as the agent’s own employees.
A significant difference between PSPs or reporting agents and Section 3504 agents is that the latter agrees to assume liability along with the employer for the employer’ trust fund tax liability. The IRS can seek to collect any unpaid trust fund taxes from both, or either, the employer and the Section 3504 agent who was designated and authorized to pay such taxes.
Professional Employer Organization. A professional employer organization (PEO) is a business entity that will contract with clients to perform some or all of the trust fund tax payment functions related to workers performing services for the client. The PEO and the client are both responsible for the trust fund tax liability.
Certified Professional Employer Organization. A certified professional employer organization (CPEO) is an entity certified by the IRS to perform federal trust fund tax withholding, reporting and payment functions related to the wages it pays to workers performing services for its customers. Under a contract between a customer and a CPEO, the CPEO pays wages to the customer’s workers and is responsible for the withholding, reporting, and paying of withholding taxes.
A CPEO uses Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement, to notify the IRS that a contract between a CPEO and a customer has started or ended. A CPEO files aggregate returns using the CPEO’s employer identification number (EIN).
Generally, the CPEO is solely liable for paying the customers’ trust fund taxes, filing returns, and making deposits and payments for the taxes reported with regard to remuneration it pays to work-site employees. A CPEO and its customer may both be liable for taxes on remuneration the CPEO pays to non-worksite employees.