IRS Says Third-Party Payers Are on the Hook for Payroll Tax Underpayments Arising From Improper Employee Retention Credit Claims
Third-party payers (TPPs) are often retained by employers to handle withholding, deposit, and payment of employment taxes for their employees. Many TPPs file employment tax returns for their employer clients using their own Employer Identification Number (EIN) instead of the employer’s EIN. If those returns result in the underpayment of payroll taxes arising from improper claims for the employee retention credit (ERC) that the TPPs filed on behalf of clients, the TPPs themselves can be held liable for such amounts.
That was the conclusion of the Internal Revenue Service’s Office of Chief Counsel in a memorandum it released on February 16, 2024. While the memo specifically discusses TPP liability for improper ERC claims, its reasoning applies to all employment tax credits claimed by TPPs in cases where they do so on employment tax returns filed under their own EINs.
The memo breaks down its liability analysis by the three types of TPPs that employers contract with for payroll, withholding, and tax return services: Section 3504 Agents, Non-Certified Professional Employer Organizations (PEOs), and Certified Professional Employer Organizations (CPEOs). The memo concludes that all three types of TPPs are liable along with their clients for any underpayment of payroll taxes arising from improper credit claims where the credit was claimed based on wages paid by the TPP to the client’s employees. “This rule applies to the ERC as it would any other employment tax credit,” the memo states.
If you have questions about this memo or its implications for your business, please contact Gary M. Remer at Maddin Hauser.