Reporting agents are companies that provide a variety of payroll and employment tax administration services for employers, such as filing quarterly employment tax returns, depositing income tax withholding and other payroll-related taxes, and filing quarterly wage reports and annual W-2 reports to the applicable federal, state and municipal agencies.
As automated payroll systems calculate payrolls, employment taxes and other amounts due for each employee and employer are determined, documented, funded, scheduled, formatted and remitted to the associated federal, state or local tax authorities with any necessary related information.
The Internal Revenue Service defines Reporting Agent as follows:
A Reporting Agent (Agent) is an . . . entity authorized to perform one or more of the following on behalf of a taxpayer:
- Prepare and electronically file Form 941, Employer's Quarterly Federal Tax Return;
- Prepare and use magnetic tape to file Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return . . . and
- Make FTD payments and submit FTD information electronically for the taxes deposited and reported on Forms 940, 941, and 945, and the other returns . . .
Reporting agents are authorized to sign and file employment tax returns, and to receive information concerning client accounts from the federal and state tax authorities, by Internal Revenue Service Form 8655, Reporting Agent Authorization.
Overview of Payroll-related Tax Payment and Reporting Requirements
Federal Tax Payment (Deposit) Requirements
Federal income and Social Security/Medicare taxes must be withheld and deposited based on schedules assigned to each employer by the IRS. These Federal Tax Deposit (FTD) schedules are assigned annually and may change over time, with or without notice from the IRS. Most FTDs must be remitted to the IRS within one to three days of each payroll date. Regardless of the assigned deposit schedule, deposits may be required one day after pay date depending on the cumulative amount of taxes incurred. Large employers must make all tax payments electronically, via the IRS EFTPS system.
Penalties ranging from 2% to 15% are automatically assessed for FTDs that are remitted late, based on the degree of lateness. 10% penalties apply for timely payments made by check rather than EFTPS (if mandated).
Federal Employment Tax Returns
Employers must generally file Form 941, Employer's Quarterly Federal Tax Return; and Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, to the IRS.
In addition, Forms W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements, must be filed annually with the Social Security Administration. Forms W-2 are IRS Information Returns, a copy of which must be provided to each employee by January 31 annually. Electronic filing of Forms W-2/W-3 (and W-2C, which are corrections to Forms W-2) is required for more than 250 Forms.
State Income Tax Withholding Payments and Reports
State income taxes withheld and other payroll-related taxes must be deposited to the applicable state agencies in accordance with a variety of state schedules and formats. Most states require employers to make periodic deposits (i.e., weekly, semiweekly); to file quarterly and annual reconciliation tax reports, and to file annual W-2 reports. Large employers must typically make all tax payments electronically, in accordance with each state's rules and electronic reporting formats, and file all W-2 reconciliation tax reports electronically, using another state-defined reporting format. Failure to pay or file electronically typically incurs a penalty of 10% of the amount due, even if funds were paid and reported on time.
Municipal Income Tax Withholding Payments and Reports
Many municipalities levy an income tax, and require employers to withhold and report the taxes withheld. Some local income taxes are collected by the state (e.g., IN, MD), while others (e.g., KY, OH, PA) are collected by the municipalities or by professional tax collection agencies. These municipalities have their own rules for the timing, form and content of tax payments and reports. Like the IRS and states, municipalities typically also require employers to file a copy of any Forms W-2 for employee who may be subject to the municipal income tax.
State Unemployment Insurance Taxes And Quarterly Wage Reports
In accordance with the 1935 Social Security Act, each state requires employers to pay quarterly unemployment insurance contributions, based on calculated tax rates, which vary for each employer and change annually, and on state definitions of wages subject to contributions.
Each state also requires employers to file detailed reports of wages paid to each employee on a quarterly basis. Almost all states require large employers to file such wage reports electronically, using a state-defined reporting format similar to the format used for W-2 reports.
A Note on Electronic Filing
Many employers are also required by law to make all tax payments electronically, and different federal, state and local rules, thresholds and electronic reporting formats often apply. Failure to pay electronically typically means a penalty of 10% of the amount due, even if funds were paid on time. Reporting agents generally report all such information electronically without regard to any mandate, for improved efficiency and accuracy.
Other Payroll Related Administrative Tasks Performed by Reporting Agents
New Hire Reporting
In accordance with the 1996 PRWORA (Welfare Reform) Act, each state requires employers to report newly hired employees to a designated state child support agency within 20 days of hiring a new employee. Reports are accepted in a variety of formats.
On average, about one in ten employees has a withholding order, such as child support or an IRS tax garnishment. Employers must comply with federal, state and local requirements on payment due dates, forms of payment, information required and procedures.
Correspondence and Problem Resolution
Reporting agents usually also handle any related correspondence with government authorities regarding the payments and filings submitted by the reporting agent. Reporting agents generally assume responsibility for any penalties incurred by the reporting agent.
Since Reporting Agents do not generally use agency-provided paper tax forms to report employment taxes for clients, the information and tax reports generated by Reporting Agents may not always be processable by the IRS, or state or local tax authorities. For example, if a client provides an incorrect employer identification number, the affected agency may not post related payments or reports accurately. For this reason, reporting agents often verify important client information before filing any returns or information.
In addition, clients expect that reporting agents will determine required deposit schedules, tax rates, reporting requirements and format of payments and reports, which vary from client to client and change over time. For this reason, reporting agents interact with tax authorities to periodically confirm each client's reporting obligations.