Are you thinking of outsourcing your payroll? Does your business already use an outsourced payroll service?

When we talk about outsourced payroll service companies, it goes a bit beyond just setting up the payroll and seeing that your employees are paid promptly. These companies provide a vital service in assisting employers to comply with local, state and federal regulations.

Payroll Service Company Categories

Payroll service companies can be grouped into one of three categories. For all three categories though to begin with, employee withholdings and net pay are computed, payroll accounting records for employers are complied, and payroll tax returns are prepared for the employer.

PSP (Payroll Service Provider)

A PSP will use the employers EIN (Employer Identification Number) to prepare all payroll tax returns. The employer will receive, sign-off and file the returns accordingly.

RA (Reporting Agents)

In the second category, the RA will prepare the payroll tax returns (using the EIN) but in this case, the RA will sign-off and file the reports themselves.

Section 3504 or PEO (Professional Employer Organizations)

The third category is made up of PEO’s, who purport to take over as the employer for the employees identified in the return. The PEO will prepare the payroll tax returns (again, using the EIN), sign-off on them and files the returns.

Employer transfer of funds

Employers who transfer to PEO funds do this to cover their net pay, payroll tax withholdings, (others as well, e.g. 401(k) contributions or health and dental insurance premiums). The PEO will then pay the net pay to employees, the payroll taxes to regulatory authorities, and other withholding taxes to the persons who remain entitled to them.

In the case of an RA, they similarly will receive employer funds. A PSP as well may receive employer payroll funds.

A note of caution on submitting files.

While extremely low, there is still a risk that the payroll service company may fail to remit your returns to the taxing authorities. 

The IRS does caution all employers that ultimately, the employer is responsible and remains liable for filing its payroll tax returns as well as depositing its payroll taxes. 

Employers address of record

When outsourcing your payroll to manage employee taxes, it is critical to keep the employer business location as the address of record for the company. Some businesses will use the payroll service company as the address of record which creates confusion should the IRS wish to contact your company to discuss a potential issue or inform of changes in tax matters.

Final thoughts

The IRS prefers technology to be used by your outsourced payroll service company when submitting payroll tax deposits. (use the EFTPS – Electronic Federal Tax Payment System). Once registered, your company will be able to look back up to 16 months of payroll history online. 

Using EFTPS also allows an employer to make tax deposits that your payroll service company would not normally make on your behalf. This might include something like the estimated income tax payments

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