Payroll services engagement letter template

Payroll work fails at the handoffs. The client sends hours late, the bank account is short on the deposit date, or nobody owns the state return. The letter should name an owner for each task and a date for each handoff.

Use the table as your scope list. Keep the rows you offer and delete the rest. The federal dates come from the IRS. State dates vary, so list them in a schedule you update each year.

This is the clause clients skim and later dispute. Say it early and say it plainly. A payroll service provider (PSP) is a business that runs payroll and payroll tax work under the employer’s EIN. The IRS says a PSP is not liable as the employer, and the employer stays liable for its employment taxes (IRS Publication 15 (2026), Employer’s Tax Guide).

The IRS outsourcing page puts it more bluntly. The employer is liable for all taxes, penalties and interest due, even when a third party failed to pay (IRS: Outsourcing payroll duties). That page also tells employers to enroll in EFTPS with their own PIN and to keep their own address of record (IRS: Outsourcing payroll duties). Put both steps in the letter as client duties.

Your own exposure is not zero. Trust fund taxes are the income tax and the employee share of social security and Medicare tax that an employer withholds from pay. If they go unpaid, the trust fund recovery penalty can reach any responsible person who acted willfully, and Publication 15 lists an accountant as one example (IRS Publication 15 (2026), Employer’s Tax Guide). Keep the client’s money moving on the client’s schedule, and write down who controls the bank account.

A reporting agent is a payroll provider that the employer has authorized on Form 8655. With that authority, the firm can sign and file certain returns, make deposits and payments, and receive copies of IRS notices (IRS Form 8655, Reporting Agent Authorization, with instructions). Without it, the client signs each return and you only prepare it.

The authorization does not shift liability. The form says it does not relieve the taxpayer of the duty to file and deposit on time (IRS Form 8655, Reporting Agent Authorization, with instructions). The reporting agent must tell the client so in writing when the engagement starts and at least quarterly after that (IRS Form 8655, Reporting Agent Authorization, with instructions). The same notice should urge the client to enroll in EFTPS, so the letter is a good place to give the first one.

1. Have the client sign Form 8655 at the same time as the letter, with the returns and periods you will handle.
2. List the same returns in the scope clause, so the letter and the form match.
3. Set a calendar reminder for the written notice each quarter (IRS Form 8655, Reporting Agent Authorization, with instructions).
4. When the engagement ends, revoke or withdraw the authorization as the Form 8655 instructions describe.

Client duties are where a payroll letter differs most from a tax return letter. The work repeats every pay period, so each duty needs a cutoff, not just a promise. Write the cutoff in business days before the pay date, and say what happens when it is missed.

• Hours, salary changes, bonuses and terminations, sent by the cutoff in a format you name, such as a payroll export or your intake form.
• Bank details for the payroll account, with a voided check or bank letter to confirm them.
• Enough money in the account before each debit date. Say that you will not release pay or deposits from an underfunded account.
• Each new hire’s details and a signed Form W-4 before the first pay run.
• Worker status. The client determines who is an employee and who is a contractor. If the client wants an IRS ruling, it can file Form SS-8 (IRS Publication 15 (2026), Employer’s Tax Guide).
• Overtime and tips status. For 2026 Forms W-2, qualified overtime and tips are reported in new boxes (IRS General Instructions for Forms W-2 and W-3 (2026)). Qualified overtime is only the premium part, such as the half in time-and-a-half, paid because section 7 of the FLSA requires it (IRS General Instructions for Forms W-2 and W-3 (2026)). So the client confirms which employees are owed FLSA overtime and which roles are tipped occupations.
• Every notice from the IRS or a state agency, forwarded on receipt, even when you expect a copy.

Your cutoffs must leave room for the deposit rules. A semiweekly depositor pays taxes for Wednesday to Friday pay dates by the next Wednesday (IRS Publication 15 (2026), Employer’s Tax Guide). If the client accumulates a $100,000 tax liability on any day, the deposit is due the next business day (IRS Publication 15 (2026), Employer’s Tax Guide). A late file from the client can make a deposit late, so the letter should say the client bears penalties caused by late data or funding.

Payroll files hold Social Security numbers, bank accounts and pay rates for every employee. Say how the client will send them, for example through a secure upload, and that you will not accept them by plain email. Say who on your team can see them and how you will notify the client of a breach. Your state may have its own breach notice rules, so check them.

For the clauses every engagement shares, such as fees and limits of liability, start from the general engagement letter template. Then have this letter reviewed by your lawyer before you send the first one.

• IRS Publication 15 (2026), Employer’s Tax Guide: A payroll service provider is not liable as the employer, the employer stays liable for employment taxes, and the publication sets the deposit schedules, return due dates and new hire reporting rule.
• IRS: Outsourcing payroll duties: The employer is liable for all taxes, penalties and interest due, and should enroll in EFTPS and keep its own address of record.
• IRS Form 8655, Reporting Agent Authorization, with instructions: Form 8655 lets a reporting agent sign and file returns, make deposits and receive notices, and the reporting agent must tell the client in writing, at the start and at least quarterly, that the client stays responsible.
• IRS General Instructions for Forms W-2 and W-3 (2026): File 2026 Forms W-2 and W-3 with the SSA, and furnish employee copies, by February 1, 2027; 2026 Forms W-2 report qualified overtime (box 12, code TT), cash tips (code TP) and Treasury tipped occupation codes (box 14b).