When it comes to selecting a payroll service provider (PSP), the IRS strongly urges employers to choose carefully. While most third-party payroll providers help businesses meet payroll deadlines and filing obligations, failures do occur — and when they do, the employer remains fully liable.
If a payroll provider fails to deposit employment taxes or file required returns, the IRS will pursue the business, not the service provider. Choosing a trustworthy and transparent PSP is critical to protecting your business from penalties, interest, and cash-flow disruptions.
Outsourcing payroll does not outsource responsibility. Even when payroll is handled by an accountant or third-party provider, employers remain legally responsible for:
Payroll tax deposits
Payroll tax filings
Accuracy of wage and withholding information
This makes oversight just as important as delegation.
If you outsource payroll, make sure the following safeguards are in place:
1. Set up your own EFTPS account
Enroll directly at EFTPS.gov using your company’s EIN and obtain your own PIN. This allows you to independently verify that federal payroll tax deposits are being made on time and in full.
2. Maintain access to state tax portals
Request and retain login credentials for your state tax department’s online account. For New York employers, this allows you to monitor withholding and unemployment tax payments directly.
3. Obtain quarterly payroll filings
After each quarter, request copies of all filed payroll tax forms, including:
Form 941 (Employer’s Quarterly Federal Tax Return)
NYS-45 (for New York employers) or the applicable state equivalent
These forms should be reviewed and retained for your records.
4. Request payroll summary reports
Ask for detailed quarterly payroll summaries showing:
Gross wages
Withholdings
Employer taxes
Net pay
These reports are essential for bookkeeping, tax returns, audits, and transitions between providers.
5. Confirm payment authorization procedures
Understand how payroll tax payments are authorized and who controls the bank drafts. Reputable providers offer transparency and confirmation of each payment.
6. Verify bonding and credentials
Confirm that the payroll provider is properly licensed, bonded (if applicable), and experienced with your industry and state compliance requirements.
7. Keep records accessible
All payroll records should be readily available to you. This information is also critical if you ever need to change payroll providers or respond to an IRS or state inquiry.
No matter how reliable your payroll service provider may be, the IRS holds the employer responsible for payroll compliance. Active oversight, access to accounts, and proper documentation are the best defenses against payroll tax problems.
Choosing the right payroll provider — and monitoring them correctly — can save your business from costly mistakes and unnecessary stress.
