• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Facebook
  • Instagram
  • LinkedIn
  • Twitter
  • YouTube
Big Ideas for Small Business logo

Barbara Weltman

Big Ideas for Small Business, Inc.

Whitepaper download

Subscribe and download our eBook, "150+ Tax Deductions for Small Business A to Z."

This field is hidden when viewing the form
Get the:

  • Home
  • About Us
  • Big Ideas For Your Business
    • Idea Of The Day ®
    • SMB Legal
    • SMB Taxes
    • SMB Financial
    • Small Business
    • Newsletter Archive
  • Services
  • Books
  • Blog
  • Multimedia
    • Videos
    • Radio Shows/Podcasts
  • Be a Guest Blogger

Who Does Your Payroll and Why Does It Matter?

October 1, 2020 / By Barbara Weltman

PayrollMany small businesses handle payroll in-house, but a growing number outsource this task to a third party. There are different types of payroll companies. And there are very good reasons why you might want to use one of them if you don’t already do so. But caution is advised.

Types of payroll companies

You can use a third party to help you meet your payroll obligations. Depending on the scope of services you use, this help can include:

  • Calculating employee withholding.
  • Paying employees’ paychecks (by paper or direct deposit).
  • Making federal and state tax deposits.
  • Preparing employer tax returns (e.g., quarterly Form 940). This can be federal and state-level returns (e.g., state unemployment tax returns).
  • Preparing and distributing employees’ W-2s and submitting the annual transmittal to the Social Security Administration.

If you outsource payroll tasks, you have several types of options:

  • Payroll Service Provider (PSP)—a company that agrees to perform any or all of the tasks listed earlier.
  • Reporting Agent (RAF)—a company that informs the IRS of its relationship with you (you authorize the company). The RA is required to file returns electronically and can exchange information with the IRS to resolve issues.
  • Section 3504 Agent—a company much like an RAF but assumes joint liability for FICA and withholding taxes.
  • Professional Employer Organization (PEO)—a company that performs some or all employment-related tasks, including payroll. This arrangement is often referred to as co-employers because you make hiring and firing decisions while the PEO handles payroll. You remain liable for employment taxes because the IRS is not bound by any agreement you have with such company.
  • Certified Professional Employer Organization (CPEO)—a company certified by the IRS to perform employment tax withholding, reporting, and payment functions. Generally, the CPEO is solely liable for these responsibilities. You can find a list of CPEO in the IRS’s voluntary certification program for PEOs. Be sure to check the list of revoked CPEOs.

Why outsource payroll responsibilities

Payroll is becoming increasingly complicated. During 2020, for example, there have been:

  • Required payments by small businesses to eligible employees for sick leave and family leave
  • An option to defer payroll.
  • The employee retention credit, which is an offset to employment taxes.
  • The Paycheck Protection Program (PPP) loan, which anyone who applied knows how important accurate payroll information needs to be.

Despite complications, outsourcing payroll is a good business practice to give you and your staff more time for operating your business. These payroll services likely are more knowledgeable about how to handle payroll responsibilities and monitor changing rules. The cost of paying a third party to do payroll cannot be ignored, but there may be no savings in DIY if you make mistakes and are subject to penalties.

What to keep in mind

Even if you use a third party to handle payroll to deposit payroll taxes, your business may remain liable for unpaid taxes—either entirely or jointly and severally liable, depending on the third party you use for payroll.

You can protect yourself by taking a few simple steps:

  • Use a reliable payroll service. As with any service provider you use, get referrals, check references, and avoid any provider making unreasonable for fraudulent promises (such as hiding payroll expenses). The big two in payroll are ADP  and Paychex.
  • Be sure to check on payroll deposits for your account. Make your deposits through EFPTS.gov and check your account regularly.
  • Look for IRS notices. The Service must tell you if there’s been a change of address for your account. If you didn’t authorize it, this is a heads up that your payroll firm is doing something shady.

If you suspect your payroll service provider is doing something improper or fraudulent with tax deposits, file a complaint with the IRS. Use Form 14157 for this purpose and the IRS will investigate.

Final thought

The IRS has a fact sheet with more information about third-party payroll providers.

Tags outsourcing payroll payroll payroll provider payroll service provider payroll tasks third-party payroll providers

Primary Sidebar

Categories

  • General Business (493)
  • Guest Blog (106)
  • Homepage (21)
  • Small Business (981)
  • SMB Financial (320)
  • SMB Legal (64)
  • SMB Taxes (324)

Barbara’s Recent Posts

  • Moms Know Best: Lessons for Entrepreneurs May 8, 2025
  • Mental Health Challenges in the Workplace May 6, 2025
  • Let’s Celebrate Small Business! May 1, 2025
  • Scaling Your Business: Adding a New State Location April 29, 2025
  • What to Do about Waste Management in Your Warehouse April 28, 2025
  • Restrooms: Not Front Office but Just as Important April 25, 2025
  • Eye Strain: A Workplace Problem to Address April 24, 2025
  • What to Do When You Can’t Get Approved for a Business Loan April 23, 2025
  • A Good Time to Review Your Company’s Driving Policy April 22, 2025
  • Learning New Ways for Spring Cleaning Your Business April 17, 2025
  • How to Build Anticipation for an Upcoming Product Release April 16, 2025
  • Proposals for Better Tax Rules for Small Businesses April 15, 2025
Awarded Top 100 Small Business Blog medal (link will open in a new window or tab)
Marquis Who's Who 2023 Badge
Top Small Business Blogs (Link will open in a new window or tab.)
8 Financial blogs small business Owners Need to Read. Invoice home.  (link will open in a new window or tab)
Best Small Business Blog, Expertido.org
Top 50 Small Business Blogs 2018
Best Small Business Blogs
BizHumm Top 100 Business Blog Award to Barbara Weltman
FitsSmallBusiness.com: Award for Best Small Business Blog 2017 (link will open in a new window or tab)
FitsSmallBusiness.com: Award for Best Small Business Blog 2016 (link will open in a new window or tab)

Footer

Big Ideas for Small Business logo

Small business ideas, business tax news and small business consulting from Barbara Weltman to provide business owners with the information they need to succeed. Visit our small business blog, Idea of The Day®, small business books and articles on small business taxes, small business finance and small business legal advice.

Contact Us

[email protected]

(772) 492-9593

gacor maxwin situs slot thailand terpercaya situs slot gacor situs gacor akun pro thailand slot bandar togel terpercaya

Latest Tweets

bigideas4sb Big Ideas for Small Business® @bigideas4sb ·
February 17

The Art and Science of Building: Exploring the Intersection of Architectural and Engineering Design https://bit.ly/40Qt0P6 #smallbusiness #design

Reply on Twitter 1891632577175253217 Retweet on Twitter 1891632577175253217 Like on Twitter 1891632577175253217 3 Twitter 1891632577175253217
bigideas4sb Big Ideas for Small Business® @bigideas4sb ·
February 17

4 Crucial Errors in Your Compliance Approach to Hiring - HR Daily Advisor https://bit.ly/4jQCcvQ #smallbusiness #hiring #compliance

Reply on Twitter 1891586740189585747 Retweet on Twitter 1891586740189585747 Like on Twitter 1891586740189585747 Twitter 1891586740189585747
bigideas4sb Big Ideas for Small Business® @bigideas4sb ·
February 17

Is Romance Back in the Office? Is this a good or bad thing?https://bit.ly/3D1Hx2x #smallbusiness #ValentinesDay #workplace #officepolicy

Reply on Twitter 1891567067897168123 Retweet on Twitter 1891567067897168123 Like on Twitter 1891567067897168123 1 Twitter 1891567067897168123
Load More

Copyright © 2008–2025 Big Ideas for Small Business, Inc  |  Designed by Hudson Fusion

  • Privacy Policy
  • Sitemap