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Roles to play: third parties and payroll outsourcing

“All the world’s a stage,” Shakespeare famously said. This is as true in tax law as in any other area. And if tax law were a play, the program notes would need to include detailed descriptions about the various roles that the actors play.

In this post, we will inform you the different types of roles played by third parties for companies that outsource their payroll tax compliance duties.

As a business owner or manager, it is clear why you may choose to outsource your payroll services. The tasks of calculating and withholding employment taxes, and making payments and reports to the IRS, can be cumbersome. In a small company, it is hard to spare time for them – especially when you are engaged in so many other activities involved in running your business.

Hiring a third-party payroll service may therefore make sense. But did you know that there are several different types of third-party arrangements that the IRS recognizes?

One of these is called a payroll service provider (PSP). Another is a reporting agent (FAF). And a third is a Section 3504 Agent.

Which arrangement you choose depends on your particular situation. It is a question well worth discussing with an experienced tax attorney.

Because the choice of third-party provider is not always straightforward, we have devoted previous posts to various aspects of this. In our February 19 post last year, for example, we discussed the question of liability for tax payments if a third-party company fails to pay them.

But it is also important to know that the scope of the duties that can be performed by a third party depends on what type of role you choose for that party to play.

Source: “Outsourcing Payroll and Third Party Payers

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