The National SocietyofTaxProfessionals

Presents

Common Payroll Issues Facing the TaxProfessional

Developed and Written by

Nina Tross, MBA, EA

Seminar materials and seminar presentations are intended to stimulate thought and discussion and to provide attendeeswith useful ideas and guidance in the areas of federal taxation and administration. These materials as well as the comments ofthe instructors do not constitute and should not be treated as tax advice regarding the use of any particular tax procedure,tax planning technique or device or suggestion or any of the tax consequences associated withthem.

Although the author has made every effort to ensure the accuracy of the materials and the seminar presentation, neitherthe author, the presenter nor the National Society of Tax Professionals assumes any responsibility for any individual’s reliance onthe written or oral information presented during the presentation. Each attendee should verify independently all statements madein the materials and during the seminar presentation before applying them to a particular fact pattern and shoulddetermine independently the tax and other consequences of using any particular device, technique or suggestion before recommendingthe same to a client or implementing the same on a client’s or on his or her ownbehalf.

Copyright © Nina Tross 2015. All RightsReserved.

Materials may not be copied or reprinted without prior writtenpermission.

TABLE OFCONTENTS

I.Common Payroll Issues Facing the TaxProfessional

Page

ARequired Payroll Tax Filings andRecordkeeping...... 1

B.Independent Contractor vsEmployee...... 3

C.Family Employees...... 5

D.Changes to IRS Form W2reporting...... 5

E.No-MatchLetters...... 5

F.E-Verify - Department of HomelandSecurity...... 6

G.Small Business Health CareCredit...... 7

H.S-Corp Shareholder-Employee CompensationIssues...... 8

I.Single Member Limited Liability Company (SMLLC)Issues...... 9

J.Members of theClergy...... 10

K.Trust Fund Recovery Penalty(TFRP)...... 12

L.OutsourcingPayroll...... 13

M.Electronic Federal Tax Payment System(EFTPS)...... 15

N.Voluntary Classification Settlement Program(VCSP)...... 15

O.Tip Income...... 16

I.Common Payroll Issues Facing the TaxProfessional

A.Required Payroll Tax Filings andRecordkeeping

1.Monthly / Semi-WeeklyPayments

a.FICA(socialsecurityandMedicaretaxeswithheldandemployer match) and federal income tax withholdingtaxdeposits

b.Monthly payment due on or before the 15th day ofthefollowingmonth

c.Semi-weeklypaymentsforpayrolldatesonWednesday,Thursday or Friday due on or before the followingWednesdayandpayrolldatesonSaturday,Sunday,MondayorTuesdaydue on or before the following Friday. An employer issubjecttosemi-weeklypaymentsiftheirtotaltaxesforthelookbackperiodweremorethan$50,000. Thepaymentrequirementsfor2015arebasedonthelookbackperiodofthethirdandfourthquartersof2013andthefirstandsecondquartersof2014.

d.Exception-One-Dayrule:Ifonanydayanemployeraccumulates $100,000 or more of employment taxes thenthepayrolltaxpaymentmustbedepositedonthenextbusinessday.

e.State withholding taxes (verify staterules)

2.Quarterly Reporting: Due dates on or before April 30, July31,

October 31, and January31

a.Form 941, Employer’s Quarterly Federal TaxReturn

b.Form 940 payment (federal unemployment tax) ifannualFUTA tax liability is more than$500

c.State withholding tax reporting (verify staterules)

d.State unemployment reporting and payment (verifystaterules)

3.Annual Reporting: Due Date on or before January31

a.Form 941, Employer’s Quarterly Federal TaxReturn

b.Form 944, Employer’s Annual Federal Tax Return - forusewhenannualliabilityforsocialsecurity,Medicare,andfederal taxes withheld is less than or equal to$1,000.

Replaces the quarterly filing of the Form941

c.Form940,Employer’sAnnualFederalUnemployment(FUTA)TaxReturn.FormanyyearstheFUTAtaxratehasbeen calculated at .8%. This rate is determined by takingthe

FUTArateof6.2%lessthe5.4%creditapplicabletothemajority of employers (for timely filing ofstateunemployment payments). However, beginning July 1,2011,the FUTA tax rate decreased to .6%. This change reducedtheeffective tax rate for most employers’ payroll calculationfrom

.8% to.6%.

d.State withholding reporting and reconciliation (verifystaterules)

e.State unemployment reporting and payment (verifystaterules)

f.FormW-2,WageandTaxStatement,andFormW-3,Transmittal of Wage and Tax Statements (due to employeeonor before January 31 and to Social Security Administrationonor before January 31)

4.Combined Annual Wage Reporting(CAWR)

a.TheSocialSecurityAdministration(SSA)andtheIRShaveanagreementtoexchangeemploymenttaxdata.SSAsharesFormW-2datawiththeIRSandtheIRSsharesForm941,943, 944, 945 (henceforth called Form 94X) and ScheduleH data withSSA.

b.TheCombinedAnnualWageReporting(CAWR)isadocumentmatchingprogramthatcomparestheFederalIncomeTax(FIT)withheld,advanceEarnedIncomeCredit(AEIC),Medicarewages,SocialSecuritywages,andSocialSecurityTipsreportedtotheIRSontheForms94XandSchedule H against the amounts reported to SSA viaFormsW-3 and the processed totals of the FormsW-2.

c.ThediscrepanciesreceivedfromSSAintotheCAWRprogram(knownasSSA-CAWRcases)isreviewedbytaxexaminerswhoattempttoreconcilethediscrepancywithoutcontactwiththeemployer.Thisincludesadditionalresearchwith SSA to determine if Forms W-2 were filed/correctedintheinterim.ThetaxexaminerreviewbeginsinAprileachyearforthethirdprecedingtaxyear(forexample:during2015 IRS is analyzing tax year 2012 SSA-CAWRcases).

5.Recordkeeping: employment tax records should be kept for atleastfour years. Records shouldinclude:

a.Amounts and dates of all wage, annuity, andpensionpayments,

b.Amounts of tips reported to the employer by theemployees,

c.Records of allocatedtips,

d.The fair market value of in-kind wagespaid,

e.Names, addresses, social security numbers, andoccupationsof employees andrecipients,

f.Any employee copies of Form W-2 and Form W-2creturnedto the employer asundeliverable,

g.Dates of employment for eachemployee,

h.Periods for which employees and recipients were paidwhileabsentduetosicknessorinjury andtheamountandweeklyrate of payments made tothem,

i.Copies of employees’ income tax withholdingcertificatessuch as FormW-4,

j.Copiesofemployees’EarnedIncomeCreditAdvancePayment Certificates, Form W-5, (discontinued in2011),

k.Dates and amounts of tax deposits andacknowledgmentnumbers for deposits made throughEFTPS,

l.Copies of payroll tax returns filed,and

m.Records of fringe benefits and expense reimbursementsmadetoemployees.

B.Independent Contractor vsEmployee

1.Common LawRules

a.Behavioral - who has the control on how the work isdone

b.Financial - how is workerpaid

c.Type of Relationship - written contracts, benefits,vacationpay

2.IndependentContractor:Thegeneralruleisthatanindividualisanindependentcontractorifthepayerhastherighttocontrolordirectonly the result of the work and not what will be done and how itwillbedone.

3.Employee: Under common law rules, anyone who performsservicesis an employee if the provider of work can control what will bedoneandhowitwillbedone.Thisissoevenwhentheworkerisgivenfreedomofaction.Whatmattersisthattheemployerhastherighttocontrol the details of how the services areperformed.

4.StatutoryEmployee: Ifworkersareindependentcontractorsunderthe common law rules, then such workers may nevertheless betreatedasemployeesby statute(statutoryemployees)forcertainemployment tax purposes if they fall within any one of thefollowingfourcategoriesandmeetthethreeconditionsdescribedunderSocialSecurity and Medicaretaxes:

a.A driver who distributes beverages (other than milk) ormeat,vegetable,fruit,orbakeryproducts;orwhopicksupanddelivers laundry or dry cleaning, if the driver is your agentoris paid oncommission,

b.Afull-timelifeinsurancesalesagentwhoseprincipalbusiness activity is selling life insurance or annuitycontracts,or both, primarily for one life insurancecompany,

c.An individual who works at home on materials or goodsthatare supplied and that must be returned to the business or toa designatedperson,iftheyalsofurnishspecificationsforthework to bedone,

d.A full-time traveling or city salesperson who works onthecompany’sbehalfandturnsinordersfromwholesalers,retailers, contractors, or operators of hotels, restaurants,orothersimilarestablishments.Thegoodssoldmustbemerchandiseforresaleorsuppliesforuseinthebuyer’sbusinessoperation.Theworkperformedforthecompanymust be the salesperson's principal businessactivity,

e.Withhold Social Security and Medicare taxes from thewagesof statutory employees if all three of the followingconditionsapply:

(i)The service contract states or implies that substantiallyallthe services are to be performed personally bythem,

(ii)They do not have a substantial investment intheequipment and property used to perform the services(otherthan an investment in transportationfacilities),

(iii)The services are performed on a continuing basis forthesamepayer.

5.Forms and AssociatedTaxes:

a.Independent Contractor: Form W-9, Request forTaxpayerIdentification Number and Certification, and Form1099-

MISC, Miscellaneous Income, Box7

b.Employee: Form W-4, Employee’s WithholdingAllowanceCertificate, and taxes discussed in SectionA

6.BackupWithholding

a.Ifthepayeefailstofurnishthepayerwiththeirtaxpayeridentification number then the payer must withhold tax attherate of 28% if payments exceed$600.

b.Backup withholding is reported on Form 945, AnnualReturnof Withheld Federal Incometax.

C.FamilyEmployees

1.Paymentsfortheservicesofachildunderage18whoworksforhisorherparentinatradeorbusinessarenotsubjecttosocialsecurityand Medicare withholding or matching, or FUTA taxes if the tradeorbusiness is a sole proprietorship or a partnership in which eachpartner is a parent of thechild.

2.The wages of a child are subject to income tax withholding aswellas social security, Medicare, and FUTA taxes if the work isfor:

a.A corporation, even if it is controlled by the child’sparent,

b.A partnership, even if one of the partners is the child’sparentunless each partner is a parent of the child,or

c.An estate, even if the estate is for a deceasedparent.

D.Changes to IRS Form W2Reporting

1.Foryearsafter2011,employersgenerallyarerequiredtoreportthecost of health benefits provided on Form W-2 in box 12, usingcodeDD.

2.Employersfilingfewerthan250FormsW-2forthepreviouscalendaryear(forexample,employersfilingfewerthan2502011Forms W-2 (meaning Forms W-2 for the calendar year 2011,whichgenerallyarefiledwiththeSSAinearly2012))willnotberequiredtoreportthecostofcoverageonthe2012FormsW-2(whichgenerally are filed with the SSA in early2013).

3.The amount to be reported is the cost of the group health planmadeavailabletotheemployeewhichisexcludablefromtheemployee’sgrossincome.Thisincludestheportionpaidbytheemployerplusthe amount paid by the employee (ifapplicable).

4.Ifanemployeeterminatesemploymentandelectstocontinuecoveragefollowingterminationofemployment,thenonlytheamount of health coverage paid during employment is reportedonFormW2.

5.An employer is not required to issue a Form W-2 reporting thecostofgrouphealthinsurancecoveragetoanindividualtowhomtheemployerisnototherwiserequiredtoissueaFormW-2,suchasaretiree or other former employee receiving nocompensation.

E.No-MatchLetters

1.No-matchlettersareissuedbytheSocialSecurityAdministration(SSA)ifanemployee’snamedoesnotcorrespondtoavalidSocialSecurity number. After nearly a four-year hiatus, in April 2011,theSSAbeganmailingno-matchletterstoemployers.Therearemanyreasons for the SSA to generate a no-matchletter:

  1. Input errors by theSSA,
  1. reporting errors by an employer oremployee,
  1. identitytheft,
  1. errors in hyphenated and/or multiple last names,or
  1. an unreported namechange.

2.Theno-matchletter,whichtheSSAcallsadecentralizedcorrespondence (DECOR) notice, says that employers do not havetorespond to the letter. However, if employers do not respond, thentheSSAmayreferthemattertotheInternalRevenueServiceortheJustice Department for criminal prosecution of Social Securityfraud

3.Sample Letter Employers Can Give to Employees (from theSSA)

“We verified the following information with Social Securityonthis date:______.

Name

______

Social Security Number______

According to Social Security, the information above does not matchSocialSecurity’s records. Youshould:

  1. Check to see if the information above matches the name andSocialSecurityNumberonyoursocialsecuritycard.Ifitdoesnotmatch,pleaseprovide me with the exact information as it is shown on your SocialSecuritycard.
  1. If the information above matches your card, please check with anylocalSocial Security office to resolve the issue. Once resolved, please informmeofanychanges. Goto nearestyou.

NOTE: This notice does not imply that you intentionally providedincorrect information about your name or Social Security Number, nordoesthis adversely affect youremployment.”

F.E-Verify - Department of HomelandSecurity

1.E-VerifyisanInternet-basedsystemoperatedbytheDepartmentofHomelandSecurityinpartnershipwiththeSocialSecurityAdministrationthatallowsparticipatingemployerstoelectronicallyverify the employment authorization of their newly hiredemployees.

2.Employers must verify that each new employee is legally eligibletoworkintheUnitedStates.ThisincludescompletingtheU.S.CitizenshipandImmigrationServices(USCIS)FormI-9,Employment EligibilityVerification.

3.E-VerifydoesnotreplacethelegalrequirementtocompleteandretainFormI-9,EmploymentEligibilityVerification.E-Verifyverifiestheemploymentauthorizationofnewhiresbasedontheinformation provided on Form I-9. Form I-9 must still beretainedandstoredineitherpaper,electronic,ormicrofilm/microficheformat.

4.A self-employed individual is not required to complete Form I-9forthemselves unless the individual is an employee of a businessentity.

G.Small Business Health CareCredit

1.Starting in 2010, small businesses that offer healthcare coverageto their employees may be eligible for the health carecredit.

2.To qualify, the small businessmust:

  1. cover at least 50 percent of the cost of single (notfamily)health care coverage for eachemployee,
  1. have fewer than 25 full-time equivalent employees(FTEs),and
  1. have average wages of less than $50,000 ayear.

3.Owners are excluded, and should not be counted in the numberofemployees, wage or premium contributionamount.

4.The tax credit cannot exceed the actual tax liability forbusinessentities other than non-profitentities.

5.Tax-exempt organizations can claim the small business healthcaretaxcreditonarevisedForm990-T.TheForm990-Tiscurrentlyusedbytax-exemptorganizationstoreportandpaythetaxonunrelatedbusinessincome.The990-Thasbeenrevisedforthe2011filing season to enable eligible tax-exempt organizations—even thosethatowenotaxonunrelatedbusinessincome—toalsoclaimthe small business healthcare tax credit, which for them is refundable. The IRS has now clarified that non-profits are takingthecredit against their payroll taxes and cannot take a credit greaterthantheir payrolltaxes.

6.Starting January 1, 2014, insurance must be purchased through the SHOP – Small Business Health Options Program – in order to qualify for the Small Business Health Care Credit. The maximum credit for qualifying small businesses is 50% but is only available for two consecutive years.

H.S-Corp Shareholder-Employee CompensationIssues

1.Generally,anofficerofacorporationisanemployeeofthecorporation. The fact that an officer is also a shareholder doesnotchangetherequirementthatpaymentstothecorporateofficerbetreatedaswages.CourtshaveconsistentlyheldthatScorporationofficer/shareholders who provide more than minor services to theircorporationandreceiveorareentitledtoreceivepaymentareemployeeswhosecompensationissubjecttofederalemploymenttaxes.

2.Distributions and other payments by an S corporation to acorporateofficermustbetreatedaswagestotheextenttheamountsarereasonable compensation for services rendered to thecorporation.

3.Some factors considered by the courts in determiningreasonablecompensation,include:

  1. Training andexperience,
  1. Duties andresponsibilities,
  1. Time and effort devoted to thebusiness,
  1. Distributionhistory,
  1. Payments to non-shareholderemployees,
  1. Timing and manner of paying bonuses to keypeople,
  1. What comparable businesses pay for similarservices,
  1. Compensationagreements,
  1. The use of a formula to determinecompensation

4.Thehealthandaccidentinsurancepremiumspaidonbehalfofthegreaterthan2-percentScorporationshareholder-employeearedeductible by the S corporation as fringe benefits but arereportableaswagesforincometaxwithholdingpurposesontheshareholder-employee’sFormW-2.TheyarenotsubjecttoSocialSecurityorMedicare (FICA) or Unemployment (FUTA) taxes. Thisadditionalcompensation is included in Box 1 (Wages) of the Form W-2,WageandTaxStatement,issuedtotheshareholder,butwouldnotbeincluded in Boxes 3 or 5 of Form W-2.

5.A2-percentshareholderemployeeiseligibleforanAGIdeductionforamountspaidduringtheyearformedicalcarepremiumsifthemedical care coverage is established by the S corporation. Previously, “established by the S corporation” meant that themedicalcare coverage had to be in the name of the Scorporation.

InIRSNotice2008-1,theIRSstatedthatifthemedicalcoverageplan is in the name of the 2 percent shareholder and not in thenameoftheScorporation,thenamedicalcareplancanbeconsideredtobe established by the S corporationif:

  1. The S corporation either paid,or
  1. Reimbursedthe2percentshareholderforthepremiumsandreported the premium payment or reimbursement as wagesonthe 2 percent shareholder’s FormW-2.

6.David E. Watson, P.C. , 8th Circuit Court of Appeals,2/21/12

  1. $24,000 wages toolow
  1. Distributions were$200,000
  1. FMV of his services determined to be $91,044, basedupon

(i)Watson was an exceedingly qualified accountantwithan advanced degree and nearly 20 years experienceinaccounting andtaxation,

(ii)Heworked35–45hoursperweekasoneoftheprimary earners in a reputable firm (LWBJ), whichhadearnings much greater than comparablefirms,

(iii)LWBJ had gross earnings over $2 million in 2002andnearly $3 million in2003,

(iv)$24,000 is unreasonably low compared toothersimilarly situated accountants,and

(v)GiventhefinancialpositionofLWBJ,Watson’sexperience, and his contributions to LWBJ, a$24,000salarywasexceedinglylowwhencomparedtotheroughly $200,000LWBJdistributedtotheScorporation in 2002 and2003.

I.Single Member Limited Liability Company (SMLLC)Issues

1.AnLLCisanentitycreatedbystatestatute.TheIRSusestaxentityclassification,whichallowstheLLCtobetaxedasacorporation,partnership,orsoleproprietor,dependingonelectionsmadebytheLLC and the number of members. An LLC is always classifiedunderfederal law as one of these types of taxableentities.

2.To be treated under federal law as a corporation, the SMLLC hastofile Form 8832 and elect to be classified as a corporation.An

SMLLCthatdoesnotelecttobeacorporationwillbeclassifiedbythe existing federal guidance as a “disregarded entity” which istaxedas a sole proprietor for federal income tax purposes.

3.AnSMLLCthatisadisregardedentitythatdoesnothaveemployeesanddoesnothaveanexcisetaxliabilitydoesnotneedanEIN.Itshould use the name and TIN of the single member owner forfederaltaxpurposes.

4.Asingle-memberLLCthatisclassifiedasadisregardedentityforfederalincometaxpurposesistreatedasaseparateentityforpurposes of employment tax and certain excise taxes. For wagespaidafterJanuary1,2009,thesingle-memberLLCisrequiredtouseitsnameandEINforreportingandpaymentofemploymenttaxesandclaim any refunds, credits, and payments on Form8849.

5.Anindividualownerofasingle-memberLLCclassifiedasadisregarded entity is not an employee of the LLC. Instead, theownerissubjecttotaxonthenetearningsfromself-employmentoftheLLC which is treated in the same manner as asole-proprietorship.

J.Members of theClergy

1.For services in the exercise of the ministry, members of theclergyreceiveaFormW-2butdonothavesocialsecurityorMedicaretaxeswithheld,

2.Ministerialservice,ingeneral,istheserviceperformedintheexerciseoftheministry,intheexerciseofdutiesasrequiredbythereligiousorder,orintheexerciseoftheprofessionasaChristianSciencepractitionerorreader.Incomereceivedforperformingministerial services is subject to SE tax unless there is anexemption.Evenifthereisanexemption,onlytheincomereceivedforperformingministerialservicesisexempt.Theexemptiondoesnotapply to any otherincome.

3.Writing religious books or articles is considered to be in theexerciseof the ministry and is considered a ministerialservice

4.To claim the exemption from SE tax, all of the followingconditionsmust bemet.

  1. File Form 4361, Application for ExemptionFrom

Self-Employment Tax for Use By Ministers, MembersofReligious Orders and Christian SciencePractitioners,

  1. Conscientiouslyopposedtopublicinsurancebecauseofindividual religious considerations (not because ofgeneralconscience),oropposedbecauseoftheprinciplesofthereligiousdenomination,
  1. File for other than economicreasons,
  1. Inform the ordaining, commissioning, or licensing body ofthechurchororderthatthetaxpayerisopposedtopublicinsurance if a minister or a member of a religious order(otherthanavow-of-povertymember).Thisrequirementdoesnotapply to Christian Science practitioners orreaders,
  1. Establish that the organization that ordained, commissioned,or licensed the taxpayer, or the religious order, isa

tax-exempt religiousorganization,

  1. Establish that the organization is a church or a conventionorassociation of churches,and
  1. Sign and return the statement the IRS mails to certify thatanexemption is being requested based on the grounds listedonthestatement.

5.Therentalvalueofhousingandutilitiesoranydesignatedhousingallowanceisexcludablefromordinary income. Theexclusioncannot be more than the reasonable pay for services. Anyallowancedesignatedforthecostofutilitiesisexcludable,uptotheactualutilitycost.

6.The home or allowance must represent compensation forservices

rendered as an ordained, licensed, or commissioned minister. Ifthetaxpayerownsthehome,thentheymaystillclaimdeductionsformortgageinterestandrealpropertytaxes.Ifthehousingallowanceexceeds the lesser of a reasonable salary, the fair rental value ofthehome,oractualexpenses,thentheamountoftheexcessmustbeincludedasotherincome.Therentalvalueofthehomeorthehousingallowancemustbeincludedasearningsfromself-employment if the SE tax is applicable.

7.Parsonage Allowance on Two Homes - Driscoll, 11th Cir.,02/08/12

a.Driscoll,135T.C.557,December142010:TheTaxCourtfoundthataministercouldexcludeaparsonageallowancethat included costs for maintaining a second home. Thecourtreasoned that §107 requires only that amounts paid as part of aminister’scompensationmustbeusedtorentorprovideahome,andnotusedforanybusinesspurpose,inordertobeexcludedfromtheminister’sgrossincome.TheTaxCourtruled it is acceptable for a parsonage allowance to be usedtoprovidetwohomesforaministeraslongasbothhomesareused as homes and not for any businesspurpose

b.Driscoll,11thCir.,February8,2012:TheIRSappealedtheTaxCourtdecisiontothe11thCircuitCourtofAppeals.TheCircuitCourtreversedtheTaxCourtdecisionandruledthattheparsonageallowancecanonlybeusedononehome.TheCircuitCourtreliedonthedefinitionofahomeasdefinedinWebster’s Third New International Dictionary. Theconsistent use of the singular in the legislative history, suchas“adwellinghouse,”“ahome,”and“thehome,”demonstratesthatCongressintendedfortheparsonageallowanceexclusionto apply to only onehome.

K.Trust Fund Recovery Penalty(TFRP)

1.Theamountofthepenaltyisequaltotheunpaidbalanceofthefederal income taxes withheld plus the employee’s portion oftheFICAtaxes.

2.TFRP is assessed against any person the IRS finds bothresponsibleforcollectingandpayingthetaxesaswellaswillfullyfailingtocollect or pay the payrolltaxes.

3.The responsible person is definedas:

  1. Officer or employee of a corporation,or
  1. Partner or employee of a partnership,or
  1. Corporate director or shareholder,or
  1. An accountant,or
  1. Volunteer director/trustee,or
  1. Employee of a sole proprietorship,or
  1. Anothercorporation

4.Willfulness is defined that theperson:

  1. Must have been, or should have been, aware oftheoutstandingtaxes,
  1. Either intentionally disregarded the law or was plainlyindifferent to the requirements,and
  1. Used the funds to pay other creditors instead of payrolltaxliability.

5.Third-partyPayers-willfulnessisstillconsideredagainsttheemployer if payroll tax obligations are not met. Factorsconsideredby the IRSinclude:

  1. Did the responsible party have knowledge of a patternofnoncompliance by the third-partypayer,
  1. Did the third-party payer employ fraud or deceptiontoconceal thenoncompliance,
  1. Did the employer receive IRS notices that employmenttaxreturns had not been filed or taxes notpaid,
  1. The length of time of thenoncompliance,
  1. Did the employer ignore the fact that the third-party payerwasnot incompliance,
  1. What safeguards were in place by the employer toensurecompliance with all tax filing andpayment.

L.OutsourcingPayroll

1.Payroll Agent, IRS Form 2678: An employer may appoint anagentunder§3504oftheCodetoperformactssuchasthewithholding,reportingandpayingoffederalemploymenttaxeswithregardtowages paid by the agent for the employer, as well as the agent’sownemployees.AsignificantdifferencefrombeingaPSPorreportingagentisthe§3504agentagreestoassumeliabilityalongwiththeemployerfortheemployer’sSocialSecurity,Medicareandfederalincome tax withholding responsibilities. An agent appointedunder

Form2678filesaggregatereturns(e-fileorpaper)usingtheagent’sEIN. The IRS can seek to collect any unpaid employment taxesfromboththeemployerandthe§3504agentwhowasdesignatedandauthorized to pay suchtaxes.

2.ReportingAgent,IRSForm8655:AnemployermayuseForm8655 to authorize a reporting agent to act on their behalf to signandfileForms940and941electronically.AnemployermayalsouseForm8655toauthorizeareportingagenttosignandfileonpaperthelimitednumberofemploymenttaxformsforwhichtheIRShasnoelectroniccapacity. ToauthorizeareportingagenttosignandfilepaperForms940and941ontheemployer’sbehalf,anemployermustprovidetheIRSwithaForm2848,PowerofAttorney and Declaration ofRepresentative.

3.Payroll Service Provider (PSP): A payroll service providertypicallypreparesemploymenttaxreturnsforsignaturebyitsemployers/clientsandprocessesthewithholding,depositandpaymentoftheassociatedemploymenttaxesforitscommonlawemployers/clients.

Third-PartyArrangementAuthority / Form 2678Agent / Form 8655ReportingAgent(RA) / PayrollServiceProvider(PSP)
Canfilecertainemploymenttaxreturns / Yes.Theagentfilesanaggregatereturnforallemployers/clients, usingtheagent’s EIN. Agent canfilethose returns listed onForm2678appointmentrequest. / Yes.TheRAsignsandisgenerallyrequiredtofileelectronically aseparatereturn for eachclient,usingtheemployer/clientsEIN. The RA muste-filereturns listed in Rev.Proc.2007-38 and shown ontheForm8655authorizationrequest,iftheformsareavailableforelectronicfiling.Onlyformsthatarenotabletobeelectronically filed canbefiled using paperforms. / Yes. The PSPprepares aseparatereturnforeachclientusingtheclient’sEIN.
Afteremployer/clientsigns thereturn,either the clientorthePSPmayfilethereturnonpaper.
Canmake / Yes. The agentdeposits / Yes. The RA depositsand / Yes. ThePSP
depositsand / and pays for taxliabilities / pays tax liabilitieson / deposits andpays
paymentsfor / the agent hasaggregated / behalf of each client,using / tax liabilitieson
employment / and reported usingthe / the client’s separateEIN, / behalf ofeach
taxes reportedon / agent’s EIN, accordingto / according to eachclient’s / client, usingthe
certainreturns? / the agent’sdeposit / depositrequirements. / client’sseparate
requirements. Agentcan / EIN, accordingto
make depositsand / eachclient’s
payments forthose / deposit
employment taxesreported / requirements.
on returns listed onForm
2678 appointmentrequest.
Can fileForm / No. Clients must fileFUTA / Yes. RA signsand / Yes.After
940,Employer’s / tax returns using theirown / generallyfiles / employer/client
AnnualFederal / EINs. / electronicallyseparate / signs thereturn,
Unemployment / returns using client’sEIN. / client or PSPfiles
(FUTA)Tax / separatereturns
Return? / using client’sEIN.
Hasemployment / Yes. Client and agentare / No. Employer/Client,not / No.
taxliability? / both liable for payingthe / RA, remains liablefor / Employer/Client,
client’s employmenttaxes, / ensuring all tax returnsare / not thePSP,
filing returns, andmaking / filed timely andall / remains liablefor
deposits and paymentsfor / deposits and paymentsare / ensuring alltax
the taxesreported. / madetimely. / returns arefiled
timely andall
depositsand
payments aremade
timely.