What Is an IRS 3504 Pay Agent and What Do They Do?
Understand the role of an IRS 3504 pay agent in managing employment taxes and the distinct legal structure of shared liability this creates for an employer.
An IRS Section 3504 agent, or pay agent, is a third party authorized by the Internal Revenue Service to handle an employer’s federal employment tax duties. This arrangement allows a business to outsource functions like withholding taxes from employee wages, filing tax returns, and making tax payments. The designation permits a third party that has control over the payment of wages to perform these actions on behalf of one or more employers.
Defining the Role and Liability of a 3504 Agent
An agent designated under Internal Revenue Code Section 3504 performs acts required of an employer, including calculating and withholding federal income tax, Social Security, and Medicare taxes. The agent is also responsible for filing Form 941 and making all associated tax deposits and payments.
The key aspect of this relationship is the legal liability structure. Both the employer and the authorized agent are “jointly and severally liable” for the proper withholding and payment of employment taxes. This means the IRS can legally collect any unpaid tax amount from either the employer or the agent until the debt is fully satisfied.
This shared liability model differs from other third-party payroll arrangements. A Reporting Agent, authorized via Form 8655, may file returns and make payments, but the legal liability for the taxes remains solely with the employer. The Reporting Agent assumes no legal responsibility for the tax payments.
The designation does not extend to Federal Unemployment Tax Act (FUTA) taxes. The employer remains responsible for filing Form 940 and paying FUTA taxes under its own Employer Identification Number (EIN). A limited exception allows agents for employers of home care service recipients to file an aggregate Form 940.
Required Information for Agent Authorization
To appoint a 3504 agent, an employer must use IRS Form 2678, Employer/Payer Appointment of Agent. This form is the official application submitted to the IRS to authorize the third party to act on the employer’s behalf. Both the employer and the prospective agent must provide specific information to complete the document.
The employer completes the initial sections of the form, providing the business’s legal name, Employer Identification Number (EIN), and mailing address. The employer must also check the boxes for the specific tax forms for which they are granting authority. These forms can include Form 941 and Form 945.
The designated agent then completes its section with its legal name, EIN, and address. The agent’s signature signifies its acceptance of the appointment and the joint liability for the taxes. By signing, the employer also authorizes the IRS to disclose confidential tax information to the agent for the granted duties.
The Authorization Submission Process
After both parties have signed Form 2678, the document is ready for submission to the IRS. The appointment is not effective until the IRS formally authorizes the request. A business should not operate under the agent agreement until this official approval is received.
The completed Form 2678 must be mailed to the specific IRS address designated for the employer’s business location. The correct mailing address is provided in the instructions for Form 2678, which are available on the IRS website.
After the IRS receives the application, it will review the request, which can take about 30 days. Upon approval, the IRS sends a written notification letter to both the employer and the agent. This letter confirms the authorization and specifies the effective date of the agency relationship.
Filing and Payment Procedures with an Authorized Agent
Once the IRS approves the appointment, the 3504 agent files a single “aggregate” tax return under its own name and EIN, rather than a separate return for each client. For quarterly employment taxes, the agent files one aggregate Form 941. This combines the tax information for all employers it represents and for its own employees.
An attachment, Schedule R (Allocation Schedule for Aggregate Form 941 Filers), must be filed with the aggregate Form 941. This schedule allocates the total amounts reported on the aggregate return to each individual employer. Schedule R lists each client by name and EIN and details their share of the wages, tips, and tax liabilities.
All federal tax deposits and payments for the aggregate return are made by the 3504 agent using its own EIN. The agent is responsible for remitting the combined tax liabilities for all its clients on time. The agent also uses its own EIN when preparing and filing annual Forms W-2 for the employees of the employers it represents.