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Concentrate on Business, Not Payroll

The popular adage that “time is money” is particularly true for small business owners. And handling payroll tax obligations can be quite time-consuming. Consider contracting with a third-party payroll provider to alleviate the burden of handling your employment tax obligations.

Most small business owners find the most value in outsourcing their responsibilities to withhold and pay Social Security, Medicare and income taxes. The outsourcing doesn’t have to be an all-or-nothing arrangement—payroll services offer different levels of service. Your decision will likely be based on your time constraints as well as your comfort level.

Ensure a Third-Party Provider Is Up To Snuff

If you decide to go the outsourcing route, take a couple steps to protect yourself:

Choose a reputable third-party provider. Use word-of-mouth recommendations from fellow entrepreneurs and trade associations as well as some background investigative work to make sure that the service is trustworthy. Using a payroll service doesn’t absolve you from liability for any of your employment tax duties. And if your service doesn’t make the proper payments, you are responsible—even if you transferred the funds to the third-party provider. Your responsibility always encompasses the original employer and employee portions of the taxes that should have been withheld, deposited and/or paid, as well as any penalties and interest.

The IRS recommends verifying the payroll service provider has a fiduciary bond in place. The bond could protect you if the payroll service provider defaults.

How Does Outsourcing Work?

Once you sign on the dotted line, your payroll service provider prepares your employment tax returns and processes the withholding, deposit and payment of employment taxes. You can also contract with a service to prepare your employees’ paychecks or pay employees by direct deposit.

If you want your third-party payroll provider to be able to file and sign your employment tax forms, complete IRS Form 8655, Reporting Agent Authorization, which allows a payroll service provider to act as your reporting agent.

Certain employers can use IRS Form 2678, Employer/Payer Appointment of Agent, to appoint an agent to withhold, report and pay federal payroll taxes, as well as assume liability along with you as the employer for your federal income tax withholding, Medicare and Social Security obligations—excluding FUTA taxes.

Keeping Tabs on Your Payroll Provider

If you do opt for outsourced payroll, remember that the onus for payroll compliance always falls on you. To minimize the chances you’ll find yourself on the wrong side of the IRS, take these precautionary steps:

Do not change the address of record for your IRS account to the payroll service provider’s address. If there is a problem with your account, the IRS will contact you at the address of record.

Register on the Electronic Federal Payroll Tax System to receive a PIN that you can use to check your business’s account payment history online for the prior 16 months. Investigate your records periodically to ensure your payroll provider is on the level.

About Business Owner’s Toolkit: With an emphasis on problem-solving dating back to 1995, Business Owner’s Toolkit™ ( offers more than 5,000 pages of free cost-cutting tips, step-by-step checklists, real-life case studies, startup advice, and business templates to small business owners and entrepreneurs. The site also offers a monthly newsletter, up-to-date news topics, and Ask Alice!, a column that closely follows industry trends and provides trusted advice to inquiring site visitors.

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