Levins Tax Law
Schedule your initial consultation:

Third-party payroll services: outsourcing and tax liability

As the owner or operator of a small business, you face multiple pressures. Marketing your product or service effectively, driving revenue growth and managing employees are only some of the many demands on your time and attention.

Given these demands, it makes sense for many businesses to use a third-party provider to handle payroll services and tax compliance tasks. In this post, we will discuss some of the considerations to keep in mind in using such providers.


Let’s begin by acknowledging the efficiency that comes from using a third-party arrangement effectively to take care of employment tax duties. A payroll service provider can handle withholding proper amounts from employees’ paychecks and make sure funds are transferred to the IRS in a timely manner.

But what happens if a third-party provider that was supposed to pay your taxes doesn’t do it? This could happen, for example, if the provider experienced financial problems, such as bankruptcy. It could also happen in cases of fraud, where the third party makes off with money that was supposed to be used to pay your taxes.

What happens is that you, as the employer, are still responsible for paying payroll taxes, even if you have outsourced those duties to a third party. This is true even if you made the necessary funds available to the third party. If something goes wrong on their end, you may still be on the hook for the taxes that weren’t paid.

This doesn’t mean you shouldn’t use a third-party provider. But it does suggest you should choose that provider carefully.

You should also be aware that when your employees’ income and payroll taxes aren’t properly withheld and paid over to the IRS, it can trigger the Trust Fund Recovery Penalty (TFRP). We discussed the TFRP in our August 21 post last year.

Source: IRS.gov, “Outsourcing Payroll Duties

No Comments

Leave a comment
Comment Information
Email Us For a Response

Resolve Your Tax Problems

Bold labels are required.

Contact Information

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.


Framingham Office
1671 Worcester Road
Suite 304
Framingham, MA 01701

Framingham Tax Law Office

Boston Office
38 Newbury Street
6th Floor
Boston, MA 02116

Boston Tax Law Office

By Appointment Only