4 Main Types of Payroll Providers: Which One Fits Your Business Best?

Outsourcing payroll sounds great… until the IRS throws four categories at you.

If you’re a business owner, you’ve probably heard someone say, “You should outsource your payroll.”

And it makes sense. Processing payroll, calculating taxes, and filing quarterly returns is a headache you probably don’t want.

So, you start researching your options and run into a delightful IRS alphabet soup for types of payroll providers: PSP, RA, Section 3504 Agent, CPEO.

Wait…what? What do these mean? Why are there four types? Which one is the right fit for your business? And what happens if something goes wrong?

At Whirks, we’re classified as a Reporting Agent (more on that in a sec), but we’ve helped tons of small businesses figure out which type of provider fits their situation. And we’ll help you do the same.

In this article, you’ll learn what each payroll provider type actually does, what they don’t do, and who holds the bag when taxes aren’t filed properly. So you can make a confident decision and keep the IRS off your back.

Understanding the 4 IRS-Classified Payroll Provider Types

The IRS, in all its infinite clarity (not sure that’s what we should call it), has carved out four official categories of third-party payroll providers. Each one comes with different responsibilities, levels of liability, and IRS authorization requirements. 

And yes, it matters which one you choose.

At Whirks, we’ve helped hundreds of businesses figure out which of these provider types fits best based on how much control they want to keep, how much risk they’re willing to take on, and what kind of support they actually need.

This next section breaks down what each payroll provider type does, who carries the legal responsibility, and how it all impacts your business operations.

Quick Comparison: What Makes Each Payroll Provider Type Different?

1. Payroll Service Provider (PSP): The OG Payroll Type

A PSP handles the basics: calculating payroll, withholding taxes (including Social Security and Medicare), filing returns under your business’s EIN, and processing Federal Unemployment Tax (FUTA).

But you’re still the one responsible if something goes sideways, including mistakes, missed deadlines, or underpayments. PSPs don’t talk to the IRS on your behalf. They also don’t carry any liability if they make a mistake.

Think of PSPs as the Adam West version of payroll providers (the OG Batman, for those of you who don’t know). They’re the foundation that all third-party payroll companies build themselves around.

PSPs are solid, dependable, and do their job, but you're still the one signing the returns and dealing with the IRS if anything goes wrong.

What You Need to Know:

• PSPs do not sign or electronically file returns for you
• You remain fully liable for accurate and timely filings
• No IRS authorization form is required
• This is a great option if you want control over tax filings and don’t mind dealing with the IRS

2. Reporting Agent (RA): Like a PSP, But with Superpowers

Reporting Agents do everything a PSP does, but with one major upgrade: They’re authorized to deal with the IRS on your behalf.

Once you sign IRS Form 8655, your RA can receive tax notices, respond to IRS issues, and electronically file returns—all while using your EIN.

RA is the Michael Keaton of payroll providers—smarter, slicker, and has gadgets to fix issues before they become problems. (Yes, we’re all in on the Batman theme, here.)

What You Need to Know:

• You still have full tax liability
• You won’t be the one spending hours on hold with the IRS
• Most RAs carry errors & omissions insurance in case a mistake is made with a client’s filings or payments
• This is our category at Whirks, and it’s ideal if you want reliable help but want to maintain control of your EIN and tax liability.

3. IRC Section 3504 Agent: You’re Sharing the Risk Now

A Section 3504 Agent files taxes under their own EIN, groups returns across clients to file in aggregate, and shares liability with you if something is wrong.

That’s right, you and the agent are both on the hook for errors. Think of this as a legal partnership, not just outsourcing.

It’s like getting business-married. You're mixing finances, so trust is everything.

What You Need to Know:

• Uses their own EIN for filing aggregate returns.
• Requires Form 2678 to be filed with the IRS.
• Cannot file federal unemployment taxes (FUTA).
• Shared liability makes this best suited for companies with strong internal finance teams or in-house CPAs.

4. Certified Professional Employer Organization (CPEO): The All-In HR Solution

CPEOs are often referred to as employee leasing companies because an employer turns over nearly all employee-related responsibilities to the CPEO.

They act like co-employers, paying wages directly, filing taxes under their EIN, providing access to benefits, and taking full responsibility and liability to the IRS for tax filings, returns, and payments. You keep the employees on-site and running your business, and they handle the paperwork.

It’s like co-parenting your employees. You handle the business stuff, and they handle the legal stuff.

What You Need to Know:

• Requires IRS Form 8973
• Employees now get direction from two parents: you and the CPEO
• Company culture and onboarding control may shift
• Great option if you're growing fast and need affordable benefits

Which Payroll Provider Type Is Right for You?

Understanding these four payroll provider types will help you evaluate proposals more effectively and ask better questions during your selection process.

Don't assume all providers offer the same service level. The type of provider significantly impacts what you can expect.

Here’s the quick decision guide:

• Want control but minimal support? → Start with a PSP.
• Want control with support and help communicating with the IRS? → Choose a Reporting Agent.
• Comfortable sharing liability and want simplified tax filing? → Consider a Section 3504 Agent.
• Want to offload everything, including HR, benefits, and liability? → A CPEO may be right for you.

Still not sure which provider type fits? Discuss your options with your CPA or internal finance team before committing, especially when liability is shared or transferred.

Your Payroll Provider Choice Has Real Consequences

Payroll goes far beyond just cutting checks on time. You have to know where your risks are and choose a provider that gives you the right level of control and support.

You came here trying to untangle a mess of IRS terms and classifications. Now, you have a clear understanding of the four types of payroll providers, what they do, what they don’t, and who’s liable when something goes wrong.

From here, it’s time to start narrowing your search:

• Figure out which provider type fits your business.
• Consult your CPA or internal finance team.
• Then compare companies that fall into that category.

Not sure if you should choose a national or independent provider? Read our breakdown to see the pros and cons of each.

And hey, if you think a Reporting Agent like Whirks might be the right fit, we’d love to help. Our team is here to make payroll simple…and maybe even a little fun.