An introduction to Payroll Service Providers and Reporting Agents and the employment tax roles of each type.
IRC Section and Treas. Regulation
There are no specific IRC Sections or Treas. Regulations for this issue.
Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)
IRM 188.8.131.52 - Third Party Payers (TPP)
IRM 5.1.24 - Field Collecting Procedures - Types of Third Party Payer Arrangements
Revenue Procedure 2012-32 - This revenue procedure provides the requirements for completing and submitting Form 8655, Reporting Agent Authorization
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.
Issue Indicators or Audit Tips
- Contracts that indicate the employer is outsourcing one or more payroll and related tax duties to a third party.
- Payroll funds being transferred from the employer to a third party.
- Wages are not paid from the employer’s bank account(s).
When auditing an employer that uses a third party payer, it is important for the examiner to recognize and identify the type of third party payer, and to inform the employer that using a third party payer does not relieve the employer of its responsibilities to file employment tax returns and deposit and pay taxes correctly and timely.
If an employer is using a PSP or Reporting Agent, the examiner should instruct the employer to:
- Verify its employer address is the address of record with the IRS.
- Check IDRS and inform the employer of the address that the IRS has on file.
- Inform the employer that the address of record can be verified by calling the IRS Business and Specialty Tax Line at 800-829-4933.
- Verify that the third party uses the EFTPS when making deposits and payments
- Advise the employer to enroll in the EFTPS to view payments and deposits made under its EIN by the third party.
IRM Section 184.108.40.206(2) states that an examiner conducting an audit of an employer using a PSP or Reporting Agent must provide this information to the taxpayer and document this in the case file. The examiner may also provide the employer with a copy of Fact Sheet 2013-9, Tips for Employers Who Outsource Payroll Duties.