Third-party payer
Third-party payer is the IRS umbrella term for another party performing employment tax functions for you, such as calculating withholding, making deposits, or filing returns.
Payroll service providers, reporting agents, Section 3504 agents, professional employer organizationsPEO. A PEO (professional employer organization) is a company that co-employs your employees under a service agreement, while you keep direction and control of the work.Click to open the term, and certified PEOs each carry different authority and different liability. Liability follows the structure rather than the task performed. Where you stay responsible, an unfiled return or a missed deposit stays your exposure even when another party performed the work. So identify the arrangement in writing, not from a phrase such as full-service payrollFull-service payroll. Full-service payroll is a payroll offering that also performs the surrounding tax and compliance tasks, such as deposits, filings, amendments, and year-end forms.Click to open the term. Naming the structure tells you who signs the return and whom the agency will contact.
Which third-party payer structure is which?
The paperwork behind each structure is the clearest way to tell them apart. A payroll taxPayroll tax. Payroll tax is the umbrella term for every tax an employer calculates, withholds, or owes because it paid wages.Click to open the term power of attorney is a signed authorization letting a named third party act for you with a specific agency. State agencies generally do not act on an authorization filed only with the IRS. Enrolling in EFTPS with an inquiry PIN lets you view the federal deposits made under your EINEIN (Employer Identification Number). An EIN, or Employer Identification Number, is the nine-digit federal tax ID the IRS assigns to a business, in the format XX-XXXXXXX.Click to open the term. A Section 3504 agent, appointed on Form 2678, files an aggregate return under its own EIN, but you generally file your own Form 940Form 940. Form 940 is the IRS annual return reporting the federal unemployment (FUTA) tax you owe on the first $7,000 a year of each employee’s wages.Click to open the term.
| STRUCTURE | FEDERAL PAPERWORK | LIABLE FOR THE TAX |
|---|---|---|
| Payroll service provider | No separate federal authorization; may deposit under your own EIN | You, generally |
| Reporting agent | Form 8655: signs and files your federal employment tax returns, makes federal deposits electronically | You, generally |
| Section 3504 agent | Form 2678 | Jointly with you, for the taxes it is authorized to pay |
| Certified PEO | Files under its own EIN for covered worksite employees; Form 8973 for each customer service contract | The certified PEO, for certain federal employment taxes on covered wages, subject to specific rules and exceptions |
- Third party arrangement chart
- Third party payer arrangements: Payroll service providers and reporting agents
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.