Many employers outsource their payroll and related tax duties to third-party payers
such as payroll service providers and reporting agents (often referred to as service
bureaus). Reputable payroll service bureaus can help employers streamline their
business operations by collecting and timely depositing payroll taxes on the
employer's behalf and filing required payroll tax returns with state and federal
Though most payroll service bureaus provide very good service, there are,
unfortunately, some who do not have their clients' best interests at heart. Over the
past year, a number of these companies have been prosecuted for stealing funds
intended for the payment of payroll taxes. So, a thorough background investigation is
There are several different types of payroll service bureaus. Regardless of the type
your business uses, it's important to understand that the service bureau is only
acting as an agent. This means state and federal tax authorities will hold you - the
employer - responsible for the service bureau's errors or omissions.
Like employers who handle their own payroll duties, employers who outsource payroll
duties are still legally responsible for any and all payroll taxes due. This includes
any federal income taxes withheld as well as both the employer and employee's share
of Social Security and Medicare taxes. This is true even if the employer forwards tax
amounts to the service bureau to make the required deposits or payments.
If you use a service bureau to process some or all of your payroll functions, here are
some steps you can take to protect the company from unscrupulous service bureaus.
- Be familiar with your payroll tax due dates. Require the payroll service provider
to provide timely proof that it has actually performed the requested services.
- Consider performing some payroll activities yourself. For example, you could ask
the service bureau to prepare the withholding reports and send them to you for
review. After reviewing the reports, you can make the deposit directly.
- Investigate the service bureau's financial condition and credit standing, both
initially and on a periodic basis thereafter. How are the company's funds
isolated from financial problems from which the bureau or its other clients may
suffer, and what coverage and conditions apply to fiduciary bonds for service
bureau employees? This is important because little protection or recourse is
available to employers whose service bureau misuses funds intended for payroll
tax payments and then goes bankrupt. Having the funds held in trust will also
protect the funds from an IRS levy of the service bureau's bank account.
- Document clearly in the contract the service bureau's policy on indemnifying the
company for interest and penalties that the service bureau's errors cause.
- Make sure your service bureau uses the Electronic Federal Tax Payment System
(EFTPS) to make tax deposits. Then, enroll in and use EFTPS to check your
company's payment history to ensure the service bureau is properly carrying out
its tax deposit responsibilities.
- Use your company's address (not the service bureau's) as the address on record
with the IRS. Doing so ensures that the company will continue to receive bills,
notices, and other account-related correspondence from the IRS. It also provides
a way to monitor the service bureau and easily spot any improper diversion of
- Contact the IRS about any bills or notices as soon as possible. This is
especially important if it involves a payment that the service bureau should have
made. Call the number on the bill, write to the IRS office that sent the bill, or
contact the IRS business tax hotline at 800-829-4933.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2014