Outsourcing Payroll: What Employers Need to Know About Tax Liability

Why Outsourcing Payroll Doesn’t Outsource Your Tax Responsibility

You need time and energy to run and grow your business, so you've outsourced your payroll process. You decided to go with a third-party payroll provider to handle some or all of your employment tax duties.

This move lightens your workload, assuming that your payroll provider is reputable, reliable, and meets filing deadlines and deposit requirements. But you can't just hire a provider and forget about it — you still must take legal responsibility for your company.

Your Tax Responsibility Depends on the Service Arrangement

Your tax responsibility depends on the type of service you use. You're never completely off the hook. You either have sole responsibility or become jointly liable, depending on the third-party arrangement you make.

Working with Pay Tech gives you an open line of communication regarding where your taxes are on the timeline.

What a Payroll Service Provider Typically Does

A payroll service provider typically prepares employment tax returns for your signature and processes the withholding, deposit, and payment of employment taxes. You authorize the provider to:

• Prepare employee paychecks and required Forms 940 and 941 using your Employer Identification Number (EIN).
• File those forms after you’ve signed them.
• Make federal tax deposits and federal tax payments.
• Prepare W-2 forms for your employees using your EIN.

Using a payroll processor doesn’t relieve you of employment tax responsibilities. Some providers assume no liability for employment tax withholding, reporting, payment, or filing duties. Pay Tech, however, does assume liability for timely payments.

Understanding Different Third-Party Payroll Relationships

Reporting Agent

A reporting agent can sign employment tax forms on your behalf. You’ll need to complete Form 8655, Reporting Agent Authorization. A reporting agent assumes no liability for employment tax withholding, reporting, payment, or filing duties.

Section 3504 Agent

A Section 3504 agent is appointed under the Internal Revenue Code. Wages can be paid by the agent through Form 2678, Employer/Payer Appointment of Agent. Your Section 3504 agent assumes liability along with you for Social Security, Medicare, and federal income tax responsibilities.

The IRS can collect any unpaid employment taxes from both you and the agent.

The Bottom Line

You are ultimately responsible for withholding, depositing, and paying federal tax liabilities. Even when forwarding tax amounts to a provider with the expectation that the provider is making tax deposits, you're still accountable for withholding both the employer and employee portions of Social Security and Medicare taxes.

This doesn't mean you shouldn’t use a third-party provider — it means you need to understand their process and maintain open communication.

Best Practices for Employers Using Payroll Services

• Use your name and address so IRS correspondence goes directly to you. Many IRS communications are time-sensitive, and delays in response can escalate matters.
• Notify your payroll provider immediately if you receive a notice. At Pay Tech, we handle tax notices for you as part of our service.
• Know tax due dates so you can double-check the payment and filing status.
• Register for the Electronic Federal Tax Payment System (EFTPS) to get your own PIN and monitor your account. This system shows your payment history for the past 16 months.

It's not just a matter of trust — it's a matter of communication. When you work closely with your payroll provider, the result will be better for you, your business, and your employees.

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