# 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.

Source: https://lopifi.com/learn/payroll-provider-vs-peo
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**Should a startup use a payroll provider or a PEO, and how do founders get paid?** 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.

> “An employer who outsources payroll and related tax duties (that is, withholding, reporting, and paying over social security, Medicare, FUTA, and income taxes) to a third-party payer will generally remain responsible for those duties, including liability for the taxes.”

— [IRS Pub. 15 (2026), §16](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF), Outsourcing payroll does not outsource the liability

**Do it yourself, through EFTPS**
- Pro: No provider fee
- Pro: Nothing between the company and its own accounts
- Con: Every withholding calculation, deposit date and return is the company's to get right
- Con: 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**
- Pro: Withholding, deposits, 941s, 940s and W-2s, under the company's own EIN
- Pro: Deposits made through EFTPS, which the company can check
- Con: The company remains liable for every tax and deposit
- Con: 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)**
- Pro: Payroll administration and tax reporting, typically for a fee based on payroll costs, often with benefits and HR
- Pro: A CPEO is generally treated as the employer for employment tax on the wages it pays, and files aggregate returns
- Con: With a PEO that isn't certified, the company stays liable for the taxes
- Con: 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

Three ways to run payroll.

A [payroll service provider](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/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.

> “A CPEO is generally treated for employment tax purposes as the employer of any individual who performs services for a customer of the CPEO and is covered by a contract described in section 7705(e)(2) between the CPEO and the customer (CPEO contract), but only for wages and other compensation paid to the individual by the CPEO.”

— [IRS Pub. 15 (2026), §16 — Certified professional employer organization](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF), A certified PEO is treated as the employer for the wages it pays

1. **Send the changes.** New hires, leavers, salary changes, new W-4s, overtime hours — before the provider's cutoff.
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.
3. **Fund it.** The provider debits the account for net pay and taxes. A failed debit is a missed deposit.
4. **Post the entries.** From the register: JE-11's shape on payday, AJE-4's at month end.
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.
6. **Reconcile 2100.** Payroll liabilities against the register and the deposits, at every close.

Each payday with a provider, in Northwind's order.

## 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.

> “Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. … If the business is incorporated, corporate officers who work in the business are employees of the corporation.”

— [IRS Pub. 15 (2026), §2](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF), Who are employees — common law, and corporate officers

**Use case — If Northwind were an S corporation.** An S corporation's founder-shareholders face a rule Northwind's don't: the S corporation must pay a shareholder who works in it [reasonable compensation](https://lopifi.com/md/glossary/reasonable-compensation) for that work, as wages, before it makes non-wage distributions to them. Northwind is a C corporation, so its founders' pay is set like anyone's; the [Entities track](https://lopifi.com/md/learn/entities) compares the two.

— [IRS, S Corporation Compensation and Medical Insurance Issues](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues), An S corporation must pay a shareholder-employee reasonable compensation before distributions

> **Equity is not payroll — until it is.** Founders' stock and employees' options are taught in the [Equity track](https://lopifi.com/md/learn/equity). Where they touch payroll is the exercise: the spread on an employee's nonstatutory option exercise goes in W-2 boxes 1, 3 and 5, with code V in box 12 — and the provider only knows if someone tells it.

**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

- [IRS Pub. 15 (2026), §16](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — Outsourcing payroll does not outsource the liability (irs)
- [IRS Pub. 15 (2026), §16 — Certified professional employer organization](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — A certified PEO is treated as the employer for the wages it pays (irs)
- [IRS Pub. 15 (2026), §11 — How To Deposit](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — Deposits are electronic: EFTPS, Direct Pay or the business tax account (irs)
- [IRS Pub. 15 (2026), §2](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — Who are employees — common law, and corporate officers (irs)
- [IRS, S Corporation Compensation and Medical Insurance Issues](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues) — An S corporation must pay a shareholder-employee reasonable compensation before distributions (irs)
- [IRS Pub. 15 (2026), §11 — Trust fund recovery penalty](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — The trust fund recovery penalty (irs)
- [General Instructions for Forms W-2 and W-3 (2026)](https://www.irs.gov/pub/irs-pdf/iw2w3.pdf) (PDF) — Forms W-2 and W-3 for 2026 wages are due February 1, 2027 (irs)
- [Wikipedia, “Professional employer organization”](https://en.wikipedia.org/wiki/Professional_employer_organization) — Professional employer organization (reference)

## Read further

- https://lopifi.com/md/startups/form-941-and-payroll-tax-deposits
- https://lopifi.com/md/startups/contractor-vs-employee

- **Track:** [Payroll](https://lopifi.com/md/learn/payroll)
- **Lesson:** Lesson 8 of 8 — 9 min
- **Terms taught:** [Payroll service provider](https://lopifi.com/md/glossary/payroll-service-provider), [Professional employer organization](https://lopifi.com/md/glossary/professional-employer-organization), [Reasonable compensation](https://lopifi.com/md/glossary/reasonable-compensation), [Trust fund recovery penalty](https://lopifi.com/md/glossary/trust-fund-recovery-penalty), [EFTPS](https://lopifi.com/md/glossary/eftps)
- **Previous:** [Recording payroll in the books, Payroll · Lesson 7](https://lopifi.com/md/learn/recording-payroll-journal-entries)
- **Next:** [What accounts payable is: procure to pay, AP · Lesson 1](https://lopifi.com/md/learn/what-is-accounts-payable)
- **The course:** https://lopifi.com/md/learn