Small Business Taxes & Management

Special Report

IRS Fact Sheet on Outsourcing Payroll Duties


Small Business Taxes & ManagementTM--Copyright 2013, A/N Group, Inc.


Many employers outsource their payroll and related tax duties to third-party payers such as payroll service providers (PSP) and reporting agents (RA). Reputable third-party payers can help employers streamline their business operations by collecting and timely depositing payroll taxes on the employer's behalf and filing required payroll tax returns with state and federal authorities.

Though most of these businesses provide very good service, there are, unfortunately, some who do not have their clients' best interests at heart. Over the past few months, a number of these individuals and companies around the country have been prosecuted for stealing funds intended for the payment of payroll taxes. Examples of these successful prosecutions can be found on

Like employers who handle their own payroll duties, employers who outsource this function are still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee's share of social security and Medicare taxes. This is true even if the employer forwards tax amounts to a PSP or RA to make the required deposits or payments. For an overview of how the duties and obligations of agents, reporting agents and payroll service providers differ from one another, see the Third Party Arrangement Chart on

Here are some steps employers can take to protect themselves from unscrupulous third-party payers.

The dollars here can be substantial. Besides the suggestions from the IRS, there are other steps you can take to protect yourself.

Check the Form 941 each quarter, if only to take a cursory look. There's a good chance you'll spot something that doesn't look right. Make sure the EFTPS payments for the quarter match the total liability on Form 941. Consider comparing the total wages to the state forms filed.

Tax professionals often offer payroll services. You might want to consider using another service. That allows your CPA, etc. to check on the payroll service. To the best of our knowledge, the largest firms have not had a problem.


Copyright 2013 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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--Last Update 07/17/13