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New IRS Rule Holds Third Party Payers or Professional Employee Organizations (PEOs) Responsible If Payroll Taxes Are Not Paid

Pay Your Taxes!

The IRS has created a regulation where a third party payer or professional employer organization (PEO) can be held as a responsible party if payroll taxes are not paid.  Unless an exception applies, the third party payer would be designated an agent of the employer under section 3504 of the Internal Revenue Code.

Under the new rule, some situations are excepted as third party responsible persons.

The three exceptions are:

  • The wages or compensation are reported on a return filed under the client’s EIN,
  • The payer is a common paymaster, or
  • The payer is the employer or the individual(s).

Editor’s Comment

In many tax cases that involved employee withholdings, many taxpayers pointed to a third party payer when the IRS came for collection.  The taxpayers’ logic in the past has been that they paid the withholding amounts to a third party who was under legal obligation to pay the tax due.  Because the third party never paid the amount due as the employer had, the third party payer, not the employer should be responsible for the taxes.  Seeing this as opportunity, the IRS has brought in this regulation.  In effect, not only is the employer a potential responsible person, so is the third party payer, who is rightfully the one with responsibility.

I would like to further add that employee withholdings are tempting sources of money in which small employers do readily invade to pay bills.  Under the law, you are not the owner of the money, you are a trust of the money, hence trust fund penalty recovery.  Pay the withholdings to the government or face its wrath.  Once into adverse tax situations, it is difficult and expensive to get out of them.  Steer clear of this issue.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors