Payroll providers, PEOs and paying founders
A provider works under your EIN and leaves you liable; a certified PEO is treated as the employer for the wages it pays. Founders who work in a corporation and take pay are on payroll.
Almost no startup runs payroll by hand. The question is what kind of outsider runs it, and how much of the employer's role that outsider takes on. The IRS's answer is short: outsourcing the work doesn't outsource the liability — with one exception.
Do it yourself, through EFTPS
- Good at
- No provider fee
- Nothing between the company and its own accounts
- Watch for
- Every withholding calculation, deposit date and return is the company's to get right
- State registrations and returns multiply with each new state
- Best for
- A founder with one or two employees in one state, and time
A payroll service provider
- Good at
- Withholding, deposits, 941s, 940s and W-2s, under the company's own EIN
- Deposits made through EFTPS, which the company can check
- Watch for
- The company remains liable for every tax and deposit
- Payments outside the provider (a wired bonus, a stipend) are missing until someone tells it
- Best for
- Most startups: the company stays the employer and buys the mechanics
A PEO (or a certified PEO)
- Good at
- Payroll administration and tax reporting, typically for a fee based on payroll costs, often with benefits and HR
- A CPEO is generally treated as the employer for employment tax on the wages it pays, and files aggregate returns
- Watch for
- With a PEO that isn't certified, the company stays liable for the taxes
- Even a certified PEO shifts federal employment tax only for the wages it pays under its contract
- Best for
- A small team that wants benefits and HR bundled with payroll
A payroll service provider works under the company's EIN and isn't liable for the company's taxes: if it misses a deposit, the IRS assesses the company. A professional employer organization co-employs the staff under its own EIN. Only a PEO the IRS has certified — a CPEO — is generally treated as the employer for federal employment tax, and only for the wages it pays under its contract.
Step 1: Send the changes
New hires, leavers, salary changes, new W-4s, overtime hours — before the provider's cutoff.
Step 2: Review the register
Gross, each withholding, net and the employer's taxes, per person. Anything that looks different from last month gets a reason.
Step 3: Fund it
The provider debits the account for net pay and taxes. A failed debit is a missed deposit.
Step 4: Post the entries
From the register: JE-11's shape on payday, AJE-4's at month end.
Step 5: Check EFTPS
With the inquiry PIN, check the provider's deposits arrived. Notices go to the company's address, not the provider's — open them.
Step 6: Reconcile 2100
Payroll liabilities against the register and the deposits, at every close.
Putting the founders on payroll
Northwind's founders took no salary in September; what the board declared on the 30th was a dividend, which is a return on their shares, not pay for their work, and never goes through payroll. When a founder does take money for working in a corporation, it's wages. Corporate officers who work in the business are the corporation's employees, so a founder's salary runs through payroll with a W-4, withholding, FICA, a W-2 and every rule above.
Wrong
The founder takes transfers from the company account when cash allows, and the bookkeeper calls them draws.
Right
The founder's salary is set by the board and paid through payroll, with withholding and a W-2.
A founder who works in a corporation and takes money for it is on payroll.
A provider does the work under your EIN and the liability stays yours; only a certified PEO takes on the employer's federal employment tax, and only for the wages it pays. Founders who work in a corporation and take pay are employees.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- IRS guidance
- IRS Pub. 15 (2026), §16 (opens in a new tab)Outsourcing payroll does not outsource the liabilityPDF · Free to read
- IRS Pub. 15 (2026), §16 — Certified professional employer organization (opens in a new tab)A certified PEO is treated as the employer for the wages it paysPDF · Free to read
- IRS Pub. 15 (2026), §11 — How To Deposit (opens in a new tab)Deposits are electronic: EFTPS, Direct Pay or the business tax accountPDF · Free to read
- IRS Pub. 15 (2026), §2 (opens in a new tab)Who are employees — common law, and corporate officersPDF · Free to read
- IRS, S Corporation Compensation and Medical Insurance Issues (opens in a new tab)An S corporation must pay a shareholder-employee reasonable compensation before distributionsFree to read
- IRS Pub. 15 (2026), §11 — Trust fund recovery penalty (opens in a new tab)The trust fund recovery penaltyPDF · Free to read
- General Instructions for Forms W-2 and W-3 (2026) (opens in a new tab)Forms W-2 and W-3 for 2026 wages are due February 1, 2027PDF · Free to read
- Background reading — not an authority
- Wikipedia, “Professional employer organization” (opens in a new tab)Professional employer organizationFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Payroll service providerA firm that runs payroll under the employer's own EIN — paychecks, deposits, Forms 941, 940 and W-2. It isn't liable for the employer's employment taxes; the employer stays liable for every deposit it makes
- Professional employer organizationA firm that co-employs a client's staff and runs payroll, benefits and HR under its own EIN for a fee. Only a PEO the IRS has certified (a CPEO) is generally treated as the employer for employment tax on the wages it pays
- Reasonable compensationThe wages an S corporation must pay a shareholder who works in the business, for that work, before it makes non-wage distributions to them. A C corporation's founder on payroll is an employee too, but the rule is the S corporation's
- Trust fund recovery penaltyA penalty of 100% of the withheld income tax and employee FICA a business failed to pay over, assessed personally on each responsible person who acted willfully — an officer, or anyone who signs the checks
- EFTPSThe Treasury's free system for federal tax deposits. Every federal payroll deposit must be made electronically — through EFTPS, IRS Direct Pay or the IRS business tax account — and an employer whose provider deposits for it can check each one in EFTPS
See also
- Form 941 and payroll tax deposits for startupsWhat Form 941 reports, monthly vs semiweekly deposits, the $100,000 next-day rule, FUTA, the R&D payroll credit, and what your provider can’t do.
- Contractor or employee? Classification for startupsContractor or employee depends on control, not the contract. The IRS test, state rules, 1099s, payroll registration and the cost of getting it wrong.