In Tax Tip 2021-103, the IRS recently reminded employers to undertake a thorough selection process when choosing a payroll services provider. Proceeding carefully is critical to both lessening the likelihood of fraud and ensuring that your compliance obligations are met.
When deciding on a payroll service provider, employers should clearly understand their payroll and employment tax responsibilities. In the Tax Tip, the IRS addressed the two primary options you’ll likely encounter when choosing a provider:
1. A certified professional employer organization (CPEO). Typically, CPEOs are solely liable for paying the customer’s employment taxes, filing returns, and making deposits and payments for the taxes reported related to wages and other compensation. Employers can find a CPEO on the IRS’s CPEO Public Listings page.
2. A reporting agent. This is a payroll service provider that informs the IRS of its relationship with a client using Form 8655, “Reporting Agent Authorization.” The employer also needs to sign the form. Reporting agents must deposit a client’s taxes using the Electronic Federal Tax Payment System (EFTPS). They can exchange information with the IRS on behalf of a client — for example, when resolving an issue.
A reporting agent is also required to provide clients a written statement reminding the employer that it — not the reporting agent — is ultimately responsible for the timely filing of returns and payment of taxes.
The IRS encourages employers to enroll in the EFTPS and ensure their payroll service providers use the EFTPS to make tax deposits. The EFTPS is free and gives employers safe and easy online access to their payment history when deposits are made under their Employer Identification Numbers. This can enable you to monitor whether your payroll service provider is meeting its tax deposit responsibilities.
Given their compliance complexity and administrative laboriousness, payroll services are often best handled by a qualified external provider that can allow you to focus on your primary mission. However, you’ll need to estimate and monitor the safety and cost-effectiveness of the arrangement carefully. We can help you decide how to proceed.
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.