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Payroll taxes and third-party payers: knowing who is responsible

The IRS is well aware that issues can arise for businesses that outsource the handling of their employment taxes to third parties. We discussed this issue in our April 26 post, examining the question of what happens when the third party fails to pay taxes due to fraud or financial problems.

This week, the IRS issued a series of tips for employers for protecting their interests when using third-party payers. Some of them are quite commonsensical, such as making sure to contact the IRS promptly if issues about tax bills or notice arise.

Taxpayers in Southern California and across the nation who outsource their employment taxes can certainly benefit from awareness of these tips.

But it is also important to acknowledge the complexity of the third-party payer field. There are various types of arrangements that are possible for outsourcing. And employers should be clear about which one they are using.

Of course, as with so many nuanced subjects, this one has its share of abbreviations. So let's just take a minute to identify two of the most common: PSP and RA.

PSP stands for payroll service provider. And RA stands for reporting agent.

There is also a third common designation for a third-party payer. That designation is Section 3504 agent.

These three designations refer to similar, but not identical, functions. A third party acting as a PSP or RA is typically authorized by a taxpayer to do this through IRS Form 8655. The authority generally includes signing and filing tax returns, usually through e-filing.

An RA, however, has additional authorization that goes beyond filing returns to actually depositing and paying taxes. This is done by an RA on a client's behalf.

A Section 3504 agent, however, does not merely perform such functions on behalf of the employer. When authorized to do so by IRS form 2678, a Section 3504 agent can take on liability (along with the employer) for proper handling of payroll taxes.

In short, all third-party payers are not created equal. And it is important to understand their formal designations.

Source: Forbes, "Do You Outsoure Payroll? Pay Attention To These IRS Tips," Charles Rettig, July 17, 2013