Employers should choose their third-party payroll service provider wisely to prevent fraud

IRS Tax Tip 2022-73, May 11, 2022

When hiring a company to handle payroll and payroll tax, it's important for businesses to choose wisely. This can help a business avoid missed deposits for employment taxes and other unpaid bills.

Most payroll service providers give quality service. However, there are a few who don't submit their client's payroll taxes and close abruptly. The damage hits their unsuspecting clients hard. Typically, these clients remain legally responsible for paying the taxes due, even if the employer sent funds to the payroll service provider for required deposits or payments.

Employers need to understand their payroll and employment tax responsibilities and choose a trusted payroll service. Here are a couple options:

  • A certified professional employer organization. Typically, these organizations 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. They file employment tax returns and deposits and pays the combined tax liabilities of their customers using the CPEO's Employer Identification number. An employer enters into a service contract with a CPEO and then the CPEO submits Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement, to IRS. Employers can find a CPEO on the Public Listings page of IRS.gov.
  • Reporting agent. This is a payroll service provider that informs the IRS of its relationship with a client using Form 8655, Reporting Agent Authorization, which is signed by the client. Reporting agents must deposit a client's taxes using the Electronic Federal Tax Payment System and can exchange information with the IRS on behalf of a client, such as to resolve an issue. They are 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 EFTPS and make sure its payroll service provider uses EFTPS to make tax deposits. It's free and it gives employers safe and easy online access to their payment history for deposits made under their Employer Identification number, enabling them to monitor whether their payroll service provider is meeting its tax deposit responsibilities.

Employers should contact the IRS about any bills or notices received, especially payments managed by a third party. Call the number on the bill, write to the IRS office that sent the bill, or contact the IRS business tax hotline at 800-829-4933.

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