How Employer of Record Services Offer You Protection

In the initial stages of evaluating whether or not to outsource the payrolling function for your contingent workers, most businesses express concerns about opening themselves up to data security issues, misfiled forms and tax payments not being submitted on time. But outsourcing this time-consuming function to a reputable third-party not only saves time, it offers an additional layer of oversight and protection not available to organizations that keep this process in-house.


When evaluating payroll service partners, it's exceptionally important to match the level of service to the unique needs of your business. The three most common third-party arrangemets are Payroll Service Providers, Reporting Agents and Section 3504 Agents. While the services provided by each type of arrangement varies, it's important to realize that while bringing in a partner alleviates the burden, as an organization you are still responsible. Let's take a closer look at the most common services:  

Payroll Service Provider (PSP) - A payroll service provider typically prepares employment tax returns for signature by employers and clients and processes the withholding, deposit and payment of associated employment taxes. Organizations can authorize their PSP's to perform one or more of the following on their behalf:

  • Preparing paychecks for employees;
  • Preparing required Forms 940 and 941, using your employer identificiation number (EIN);
  • Filing Forms 940 and 941 after a representative within your organization has signed them;
  • Making federal tax deposits (FTDs) and federal tax payments(FTPs);
  • Submitting FTD and FTP information for the taxes reported on the Forms 940 and 941; and/or:
  • Preparing W-2 Forms for your employees using your EIN

Keep in mind, a PSP assumes no liability for your employment tax witholding, reporting, payment, and/or filing duties. You are still responsible for your employment tax responsibilities.

Reporting Agent (RA) - If you would prefer to have your payroll partner handle the signing of our employment tax forms (Like Forms 940 and 941) on your behalf, selecting a service that can operate as an RA is your best option. In order to assign an RA, you must complete Form 8655. Again, using an RA does not exempt your organization from your tax responsibilities. Additionally, you are ultimately responsible for withholding, reporting, payment, and/or filing duties.

Section 3504 Agent - Larger businesses often appoint a Section 3504 agent to undertake the withholding, reporting and payment of federal employment takes with regarding to wages paid by the agent for the employer, as well as the agent's own employees. This arrangement is facilitated via the completion of Form 2678 (Employer/Payer Appointment of Agent). This relationship provides the highest level of protection for businesses, as a section 3504 agent agrees to assume liability along with the employer for the employer's Social Security, Medicare and federal income tax withholding responsibilities. 

Whether you're searching for a Employer of Record Services partner to only assist you with your preparation and filing, or if you're ready to invest in a relationship wtih a section 3504 agent to share the liability and responsibility, your business will enjoy the benefits of having a partner review these time-consuming details for you so you can focus on other areas while knowing you are compliant.

To learn more about how your business can benefit from Employer of Record Services, we invite you to review our latest infographic, "Top 5 Reasons to Consider Employer of Record Services," exploring the leading reasons why businesses outsource the payment of their contingent workers. 

Download Your Free Infographic