The following common third party arrangements are discussed in this section:
Payroll Service Provider
Section 3504 Agent
- Certified Professional Employer Organization
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:
Prepare the paychecks for the employees of a common law employer/client;
Prepare Forms 940 and 941 for each separate common law employer/client using that client’s employer identification number (EIN);
File Forms 940 and 941 for each separate common law employer/client that are signed by that client;
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
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.
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. 2012-32 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.
A party seeking authorization to serve as an employer’s § 3504 agent must follow the procedures set forth in Rev. Proc. 2013-39, with a limited exception provided for certain household workers. 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.
Certified Professional Employer Organization (CPEO)
A certified professional employer organization (CPEO) is an entity certified by the IRS to perform federal employment tax withholding, reporting, and payment functions related to the wages it pays to workers performing services for its customers. Under a CPEO contract between a customer and a CPEO, the CPEO pays wages to the customer’s workers and is responsible for the withholding, reporting and paying of federal employment taxes with regard to these wages.
Certified professional employer organizations use Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement, to notify the IRS that a CPEO contract between a CPEO and a customer has started or ended. A CPEO files aggregate returns using the CPEO’s EIN. For more information on CPEOs, visit the CPEO website.