Calpha-formylglycine is the catalytic residue of sulfatases. Formylglycine is generated by posttranslational modification of a cysteine (pro- and eukaryotes) or serine (prokaryotes) located in a conserved (C/S)XPXR motif. The modifying enzymes are unknown. AtsB, an iron-sulfur protein, is strictly required for modification of Ser(72) in the periplasmic sulfatase AtsA of Klebsiella pneumoniae. Here we show (i) that AtsB is a cytosolic protein acting on newly synthesized serine-type sulfatases, (ii) that AtsB-mediated FGly formation is dependent on AtsA's signal peptide, and (iii) that the cytosolic cysteine-type sulfatase of Pseudomonas aeruginosa can be converted into a substrate of AtsB if the cysteine is substituted by serine and a signal peptide is added. Thus, formylglycine formation in serine-type sulfatases depends both on AtsB and on the presence of a signal peptide, and AtsB can act on sulfatases of other species. AtsB physically interacts with AtsA in a Ser(72)-dependent manner, as shown in yeast two-hybrid and GST pull-down experiments. This strongly suggests that AtsB is the serine-modifying enzyme and that AtsB relies on a cytosolic function of the sulfatase's signal peptide.