Small businesses and payroll taxes, part 1: using a third-party provider

As a small business owner or manager, you’ve got a lot of balls to keep in the air. Serving your customers well, building your brand and competing effectively all require your attention on multiple levels.

With these challenges to meet, it can be difficult to keep up with payroll tax compliance matters. In this two-part post, we will discuss some key aspects of this.

We’ll start by discuss how businesses often choose to use third-party providers to handle payroll taxes. And in part two, we will explain how an attorney can help resolve issues that can arise.

Handling payroll taxes effectively is of course only one factor in creating a successful small business. But it is an important one because payroll costs are such a significant expense as well as an administrative burden.

To keep costs down, you may rely to a greater or lesser degree on independent contractors who get 1099s rather than employees who get W-2s. You won’t have the same income tax withholding responsibilities for contractors, or the same obligation to match Social Security contributions.

Your decision here will depend a lot on the industry you are in and your business model. But regardless of how you play this, it still takes considerable effort to handle your payroll.

That is why so many small businesses outsource their payroll duties to a third-party provider. This provider not only gets your people paid, but also takes care of filing and paying over employment taxes to revenue agencies.

There are actually several different types of third-party providers recognized by the IRS. Payroll service providers (PSPs) are one of the most common types. But there are also reporting agents (RAF), as well as IRC 3504 agents (named after a section of the tax code).

What happens if one of these third-party providers fails to meet its responsibilities? We will discuss that n part two of this post.