Many employers outsource some of their payroll and related tax duties to third-party payroll service providers. These providers help ensure compliance with the payroll tax reporting requirements. Some of the services they typically provide include:
- Administering payroll and employment taxes on behalf of the employer, where the employer provides the funds to the third-party.
- Reporting, collecting and depositing employment taxes with state and federal authorities.
However, employers that outsource some or all of their payroll responsibilities should consider the following:
- The employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though the third-party is making the deposits, the employer is the responsible party. If the third-party fails to make the federal tax payments, the IRS may assess penalties and interest on the employer’s account. The employer is liable for all taxes, penalties and interest due. The employer’s officers may be held personally liable for certain unpaid federal taxes.
- If there are any issues with an account, the IRS will contact the employer. IRS correspondence is sent to the address of record so it is strongly suggested that the address not be changed to that of the payroll service provider as it may significantly limit the employer’s ability to be timely informed of tax matters involving it.
- For the employer’s protection, the payroll service provider should be asked if it has a fiduciary bond in place. This could protect the employer in the event of default.
- Employers should ask the service provider to enroll in and use EFTPS (Electronic Federal Tax Payment System), so the employer can confirm payments made on its behalf. EFTPS maintains a business’s payment history for 16 months and can be viewed on-line after enrollment.
Tip. The IRS recommends employers verify EFTPS payments as part of their bank account reconciliation process.
EFTPS is secure, accurate, easy to use and provides an immediate confirmation for each transaction. The service is offered free of charge from the U.S. Department of Treasury and enables employers to make and verify federal tax payments electronically 24 hours a day, 7 days a week through the Internet, or by phone. For more information, employers can enroll online at www.eftps.gov, or call EFTPS Customer Service at 1-800-555-4477 for an enrollment form.
There have been recent prosecutions of individuals and companies who have, acting under the guise of a service provider, stolen funds intended for payment of employment taxes. For more information, visit the IRS Website and type in the key words “employment tax investigations”. Remember, employers are ultimately responsible for the payment of income tax withheld and both the employer and employee portions of Social Security and Medicare taxes.