Imagine running a successful business, with your energies focused on growth, innovation, and your customers. Then one day, you receive a notice from the IRS. Your heart sinks. Your payroll service provider hasn’t been making your payroll tax deposits. You’re suddenly in deep water – legally responsible for all those missed deposits and unfiled returns. Sounds like a nightmare, doesn’t it? But this scenario is not just a figment of the imagination; it’s the harsh reality for businesses that fall prey to unprofessional or fraudulent payroll service providers.

When it comes to choosing a third-party payroll service provider, it’s a matter of trust. The right provider, qualified and reliable, can be a bedrock for your business, ensuring that you remain secure and tax compliant. But choose unwisely, and your business could be left in the lurch, as unscrupulous providers can take your payroll taxes and disappear without warning. The stakes are high because the law doesn’t care who was supposed to deposit your taxes – it only cares that they weren’t deposited.

So, how do you protect yourself and your business from such a disastrous situation? Here are some trusted options you can consider:

1. Certified Professional Employer Organization (CPEO): A CPEO takes on the responsibility of filing your employment tax returns and making the required deposits and payments. They use their Employer Identification Number (EIN) to file and pay your combined tax liabilities. To make use of a CPEO, you enter into a service contract with them, and they submit Form 8973 to the IRS. You can find a CPEO on the Public Listings on the IRS website.
2. Reporting Agent: A reporting agent uses the Electronic Federal Tax Payment System (EFTPS) to deposit your taxes. They can share your information with the IRS to resolve any issues and must remind you in writing that you, as the employer, are responsible for filing tax returns and paying taxes on time. To establish their relationship with you, reporting agents submit Form 8655, which you need to sign.
3. Section 3504 Agent: This type of third-party payroll service provider takes on the task of withholding, reporting, and paying your employment taxes. They assume liability along with you for Social Security, Medicare, and federal income tax withholding responsibilities. They file combined returns for all their employer customers using their EIN. However, if you use a Section 3504 agent, you’ll likely still need to file FUTA tax returns using your own EIN. To appoint a third party as an agent, you submit Form 2678 to the IRS.

To ensure your payroll service provider is doing its job, the IRS encourages employers to enroll in EFTPS. This free service gives you online access to your payment history for deposits made with your EIN, allowing you to monitor whether your payroll service provider is meeting its tax deposit responsibilities.

If you ever receive any bills or notices from the IRS, especially if they relate to payments managed by a third party, contact the IRS immediately. You can call the number on the bill, write to the IRS office that sent the bill, or call the IRS business tax hotline at 800-829-4933.

In conclusion, picking the right third-party payroll service provider is not just a matter of convenience – it’s a matter of security and compliance. It’s about safeguarding your business from unnecessary risk and ensuring that the nightmare scenario described above remains just that – a nightmare, not a reality.

For more information, refer to the IRS resources on Employment Taxes, Outsourcing Payroll and Third-Party Payers, Third Party Arrangement Chart, CPEO Customers – What You Need to Know, and Reporting Agents File.