Third Party Arrangements

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Third Party Arrangements

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

y Payroll Service Providery Reporting Agenty 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 associatedemployment 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 moreof the following acts on the common law employers 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

clients 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/or5. Prepare Forms W-2 for the employees of a common law employer/client that include the

EIN of that client.

An employers use of a PSP does not relieve the employer from its responsibility of ensuring thatall 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 itsclients 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 andfile 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 whichthe IRS has no electronic capacity. To authorize a reporting agent to sign and file paper Forms

940 and 941 on the employers behalf, an employer must provide the IRS with a Form 2848,Power of Attorney and Declaration ofRepresentative.


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A Form 8655 (PDF) reporting agent provides payroll services for one or more employers, using

each clients (employers) employer identification number (EIN) to file separate returns(generally e-file only) on the clients behalf. A reporting agent may also deposit and pay taxes on

the client's behalf. An employers use of a reporting agent does not relieve the employer from itsresponsibility 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 theagent for the employer, as well as the agents own employees. A significant difference from

being a PSP or reporting agent is the section 3504 agent agrees to assume liability along with theemployer for the employers Social Security, Medicare and federal income tax withholding

responsibilities. An agent appointed under Form 2678 files aggregate returns (e-file or paper)

using the agents EIN. The IRS can seek to collect any unpaid employment taxes from both theemployer and the 3504 agent who was designated and authorized to pay such taxes. Thesection 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 employers 3504 agent must follow the procedures

set forth in Rev. Proc. 70-6, 1970-1 C.B. 420, with a limited exception provided for certainhousehold 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/PayerAppointment 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 clients (employers) employer identification number (EIN) to file separate returns

(generally e-file only) on the clients behalf. A reporting agent may also deposit and pay taxes onthe client's behalf.

A Form 2678 (PDF) agent acts as the employer, assuming liability along with the employer forthe employers Social Security, Medicare and federal income tax withholding responsibilities.

An agent appointed under Form 2678 files aggregate returns (e-file or paper) using the agentsEIN.


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The chart below illustrates the most significant differences.

Third-Party

Arrangement

Authority

Form 2678 AgentForm 8655 Reporting

Agent (RA)

Payroll Service

Provider (PSP)

Can file certain

employment taxreturns?

Yes. The agent files an

aggregate return for allemployers/clients, using

the agentsEIN. Agentcan file those returns

listed on Form 2678appointment request.

Yes. The RA signs and is

generally required to fileelectronically a separate

return for each client,using the

employer/clients EIN.The RA must e-file

returns listed in Rev.

Proc. 2007-38 and shown

on the Form 8655

authorization request, ifthe forms are availablefor electronic filing. Only

forms that are not able tobe electronically filedcan be filed using paper

forms.

Yes. The PSP

prepares a separatereturn for each client

using the clientsEIN. After

employer/client signsthe return, either the

client or the PSPmay file the return

on paper.

Can makedeposits and

payments foremployment

taxes reportedon certain

returns?

Yes. The agent depositsand pays for tax

liabilities the agent hasaggregated and reported

using the agents EIN,according to the agents

deposit requirements.Agent can make deposits

and payments for thoseemployment taxes

reported on returns listedon Form 2678

appointment request.

Yes. The RA depositsand pays tax liabilities on

behalf of each client,using the clients

separate EIN, accordingto each clients deposit

requirements.

Yes. The PSPdeposits and pays tax

liabilities on behalfof each client, using

the clients separateEIN, according to

each clients depositrequirements.

Can file Form

940,EmployersAnnualFederalUnemployment

(FUTA) TaxReturn?

No.[1] Clients must file

FUTA tax returns usingtheir own EINs.

Yes.RA signs and

generally fileselectronically separatereturns using clients

EIN.

Yes. After

employer/client signsthe return, client orPSP files separate

returns using clientsEIN.

Has employment

tax liability?

Yes. Client and agent are

both liable for paying the

No. Employer/Client, not

RA, remains liable forNo.Employer/Client, not


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clients employment

taxes, filing returns, andmaking deposits and

payments for the taxesreported.

ensuring all tax returns

are filed timely and alldeposits and payments

are made timely.

the PSP, remains

liable for ensuring alltax returns are filed

timely and alldeposits and

payments are madetimely.

Specific

guidance inaddition to

Code,regulations and

Circular E.

Rev. Proc. 70-6;

Notice 2003-70 (stateand local governmental

agents).

Rev. Proc. 2007-38.

[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. SeeRev. Proc. 80-4and Notice 2003-70 for special instructions.

Documents

Third Party Arrangements