Third Party Payer Arrangements – Section 3504 Agents


An introduction to Section 3504 Agents and the related employment tax responsibilities. 

IRC Section and Treas. Regulation

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)


Employers can enter into an arrangement with a third party to perform some or all of the employer’s Federal employment tax withholding, tax return preparation, reporting, and tax payment responsibilities.

One type of such arrangement exists when an agent appointed by an employer is authorized by the Service under Section 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.  

Section 3504 of the Code states that in case an agent has the control, receipt, custody, or disposal of, or pays the wages of an employee or group of employees, employed by one or more employers; the agent may be designated to perform such acts as are required of employers. All provisions of law (including penalties) applicable to an employer apply to an agent so designated. The employer for whom such agent acts remains subject to the provisions of law (including penalties). (Joint and several liability)

Treas. Reg. 31.3504-1 provides that an agent may be designated by application. An employer uses Form 2678, Employer/Payer Appointment of Agent, to request the Service to authorize a third party as an agent of the employer. A Section 3504 agent performs acts such as the withholding, reporting and paying of employment taxes.  The Section 3504 agent files one return for each period on behalf of all the employers it represents using its own EIN and address on the returns (“aggregate return”).  Form 941 is filed with Schedule R (Allocation Schedule for Aggregate Form 941 Filers). The Section 3504 agent’s EIN will also be used on Forms W-2 filed with Social Security and furnished to employees. If an agent is acting as an agent for two or more employers or for itself and another employer and pays social security wages in excess of the wage base to an employee of more than one employer, the agent must file separate Forms W-2 for the employee reflecting the wages paid by each employer.

Generally, Form 940 may not be filed aggregately. However, Treas. Reg. 31.3504-1(b) provides that Section 3504 agents representing employers who receive home care services paid in whole or in part through a federal, state or local program may meet an exception that would allow them to file an aggregate Form 940. See Revenue Procedure 2013-39 for additional details.

There are two different types of agents under section 3504 however we only are referring to agents under 31.3504-1. This document does not include Treas. Reg. 31.3504-2 designation of payor to perform acts of an employer.

Issue Indicators or Audit Tips

Issue Indicators

  1. Salaries and wages reported but no employment tax returns filed.
  2. Contracts that indicate the employer is outsourcing one or more payroll and related tax duties.
  3. Payroll funds being transferred from the employer to a third party.
  4. Wages not paid from the employers’ bank account(s).

Audit Tips

When auditing an employer that uses a third party payer, it is important for the examiner to recognize and identify the type of third party payer, and to inform the employer that using a third party payer does not relieve the employer of its employment tax responsibilities. (IRM

Examiners should advise the employer that it remains liable along with the IRC 3504 agent. In addition, the examiner should advise the employer to use due diligence in requesting authorization from the IRS to appoint an IRC 3504 agent on Form 2678, and to continue to use the IRC 3504 agent after the authorization is approved.