Third Party Arrangements

 
The following common third party arrangements are discussed in this section:

 Payroll Service Provider

 Reporting Agent
 Section 3504 Agent

Payroll Service Provider (PSP)

A payroll service provider typically prepares employment tax returns for signature by its
employers/clients and processes the withholding, deposit and payment of the associated
employment taxes for its common law employers/clients. An employer may enter into an
agreement with a PSP under which the employer may authorize the PSP to perform one or more
of the following acts on the common law employer’s behalf:

1. Prepare the paychecks for the employees of a common law employer/client;

2. Prepare Forms 940 and 941 for each separate common law employer/client using that
client’s employer identification number (EIN);
3. File Forms 940 and 941 for each separate common law employer/client that are signed by
that client;
4. Make federal tax deposits (FTDs) and federal tax payments (FTPs), and submit FTD and
FTP information for the taxes reported on the Forms 940 and 941; and/or
5. Prepare Forms W-2 for the employees of a common law employer/client that include the
EIN of that client.

An employer’s use of a PSP does not relieve the employer from its responsibility of ensuring that
all of its federal employment tax duties are met.  A PSP assumes no liability for their
employer/clients’ employment tax withholding, reporting, payment, and/or filing duties. 

Reporting Agent

Generally, a reporting agent is a PSP that is authorized to perform certain acts on behalf of its
clients’ employees.  The IRS has prescribed Form 8655, Reporting Agent Authorization as the
appropriate authorization form for an employer to use to designate a PSP as a reporting agent. 
See Rev. Proc. 2007-38, 2007-25 I.R.B. 1442 for more information. 

An employer may use Form 8655 to authorize a reporting agent to act on their behalf to sign and
file Forms 940 and 941 electronically.  An employer may also use Form 8655 to authorize a
reporting agent to sign and file on paper the limited number of employment tax forms for which
the IRS has no electronic capacity.  To authorize a reporting agent to sign and file paper Forms
940 and 941 on the employer’s behalf, an employer must provide the IRS with a Form 2848,
Power of Attorney and Declaration of Representative.
A Form 8655 (PDF) reporting agent provides payroll services for one or more employers, using
each client’s (employer’s) employer identification number (EIN) to file separate returns
(generally e-file only) on the client’s behalf. A reporting agent may also deposit and pay taxes on
the client's behalf. An employer’s use of a reporting agent does not relieve the employer from its
responsibility of ensuring that all of its federal employment tax duties are met.  A reporting agent
assumes no liability for their employer/clients’ employment tax withholding, reporting, payment,
and/or filing duties.

Section 3504 Agent

An employer may appoint an agent under § 3504 of the Code to perform acts such as the
withholding, reporting and paying of federal employment taxes with regard to wages paid by the
agent for the employer, as well as the agent’s own employees.  A significant difference from
being a PSP or reporting agent is the section 3504 agent agrees to assume liability along with the
employer for the employer’s Social Security, Medicare and federal income tax withholding
responsibilities. An agent appointed under Form 2678 files aggregate returns (e-file or paper)
using the agent’s EIN. The IRS can seek to collect any unpaid employment taxes from both the
employer and the § 3504 agent who was designated and authorized to pay such taxes.  The
section 3504 designation does not apply to FUTA tax, with a limited exception provided for
certain household workers.  See Notice 2003-70.

A party seeking authorization to serve as an employer’s § 3504 agent must follow the procedures
set forth in Rev. Proc. 70-6, 1970-1 C.B. 420, with a limited exception provided for certain
household workers.  See Notice 2003-70.  The application for authorization must be submitted to
the IRS for approval.  The application must include a completed Form 2678, Employer/Payer
Appointment of Agent (PDF), executed by each employer for whom the agent is to act.

Third Party Arrangement Chart

 
There are some differences between a payroll service provider, reporting agent authorized under
Form 8655, Reporting Agent Authorization (PDF) and an agent appointed using Form 2678,
Employer/Payer Appointment of Agent (PDF).

A Form 8655 (PDF) reporting agent provides payroll services for one or more employers, using
each client’s (employer’s) employer identification number (EIN) to file separate returns
(generally e-file only) on the client’s behalf. A reporting agent may also deposit and pay taxes on
the client's behalf.

A Form 2678 (PDF) agent acts as the employer, assuming liability along with the employer for
the employer’s Social Security, Medicare and federal income tax withholding responsibilities. An
agent appointed under Form 2678 files aggregate returns (e-file or paper) using the agent’s EIN.
The chart below illustrates the most significant differences.

Third-Party
Form 8655 Reporting Payroll Service
Arrangement Form 2678 Agent
Agent (RA) Provider (PSP)
Authority
Can file certain Yes. The agent files an Yes. The RA signs and is Yes. The PSP
employment tax aggregate return for all generally required to file prepares a separate
returns? employers/clients, using electronically a separate return for each client
the agent’s EIN. Agent return for each client, using the client’s
can file those returns using the EIN.  After
listed on Form 2678 employer/clients EIN. employer/client signs
appointment request. The RA must e-file the return, either the
returns listed in Rev. client or the PSP may
Proc. 2007-38 and shown file the return on
on the Form 8655 paper.
authorization request, if
the forms are available
for electronic filing. Only
forms that are not able to
be electronically filed can
be filed using paper
forms.
Can make Yes. The agent deposits Yes. The RA deposits Yes. The PSP
deposits and and pays for tax and pays tax liabilities on deposits and pays tax
payments for liabilities the agent has behalf of each client, liabilities on behalf
employment aggregated and reported using the client’s separate of each client, using
taxes reported on using the agent’s EIN, EIN, according to each the client’s separate
certain returns? according to the agent’s client’s deposit EIN, according to
deposit requirements.  requirements. each client’s deposit
Agent can make deposits requirements.
and payments for those
employment taxes
reported on returns listed
on Form 2678
appointment request.
Can file Form No. [1] Clients must file Yes. RA signs and Yes. After
940, Employer’s FUTA tax returns using generally files employer/client signs
Annual Federal their own EINs. electronically separate the return, client or
Unemployment returns using client’s PSP files separate
(FUTA) Tax EIN. returns using client’s
Return? EIN.
Has employment Yes. Client and agent are No. Employer/Client, not No. Employer/Client,
 Third-Party
Form 8655 Reporting Payroll Service
Arrangement Form 2678 Agent
Agent (RA) Provider (PSP)
Authority
tax liability? both liable for paying the RA, remains liable for not the PSP, remains
client’s employment ensuring all tax returns liable for ensuring all
taxes, filing returns, and are filed timely and all tax returns are filed
making deposits and deposits and payments timely and all
payments for the taxes are made timely. deposits and
reported. payments are made
timely.
Specific Rev. Proc. 70-6; Rev. Proc. 2007-38.
guidance in Notice 2003-70 (state
addition to Code, and local governmental
regulations and agents).
Circular E.
[1] Exceptions may apply for an agent where the employer is a disabled individual or other
welfare recipient receiving in home-care through a state or local program. See Rev. Proc. 80-4
and Notice 2003-70 for special instructions.