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IRS Provides Guidance to Employers Using Payroll Service Providers

May 24, 2017

These days, the majority of mid-to-large employers use payroll service providers for ease of payroll recordkeeping and administration.  These third party providers help ease the burden of calculating taxes and withholding, and filing timely returns with state and federal administrative agencies.  But while they are increasingly relying on third parties, employers ultimately are responsible for the payment of income tax withheld and the employer and employee portions of Social Security and Medicare taxes, notwithstanding third party negligence or even malfeasance.

In its Spring 2017 SSA/IRS Reporter Newsletter, the IRS highlighted this often-overlooked point—“You can outsource your payroll tax duties but not your payroll tax responsibilities.” 

The IRS laid out five things all employers using payroll service providers should do to stay vigilant regarding their payroll tax responsibilities:

1. Deposit payroll taxes directly. 

While many employers allow their payroll service providers to register with the U.S. Treasury using the Electronic Federal Tax Payment System (EFTPS) on the employers’ behalf, the IRS cautioned against this practice—“Your payroll service may complete this registration for you and use EFTPS on your behalf, but how do you know the service is making your deposits?”  By the time employers find out a payroll service provider failed to make a payment, it is too late—recovery is a long, expensive, and often fruitless enterprise.

2. Monitor Deposits. 

In the event employers delegate deposit-making to a provider, the IRS recommends that employers stay vigilant by reviewing their accounts. Employers should receive a PIN number when a provider enrolls on their behalf—employers cannot use EFTPS with the PIN, but they can review their accounts.

3. Do not surrender address of record. 

Often, a service provider will suggest it be identified as the address of record with the IRS.  The IRS cautions against this practice.  In the event a provider attempts to change the address of record, employers should receive correspondence from the IRS explaining the proposed change. 

4. Complain when concerned. 

The IRS has a complaint form designed specifically for tax return preparers. According to the IRS, these complaints receive expedited review and investigation.

5. Act on IRS notices. 

In the event employers receive a notice or letter from the IRS, they should contact their payroll service provider and respond to the IRS immediately.  Employers demonstrating good faith and reasonable due diligence can often avoid more onerous IRS sanctions in the event of nonpayment.

While the calculations of tax and withholding can seem complicated, the IRS summarized an employer’s duty quite simply: “At the end of the day, you’re responsible for meeting your payroll tax responsibilities and could be financially liable for responsibilities not met.”  By following these IRS recommendations, employers using third party payroll service providers can significantly reduce potential payroll tax issues.

Our Insights are published as a service to clients and friends. They are intended to be informational and do not constitute legal advice regarding any specific situation.