A Section 3504 agent may appoint a subagent through an approved Form 2678

Plain-English summary

Counsel distinguished a Section 3504 agent from a payroll service provider. A payroll service provider files separate employment tax returns under each employer's EIN, while a Section 3504 agent files an aggregate return under its own EIN and allocates wages and taxes on Schedule R. Under Revenue Procedure 2013-39, a Section 3504 agent may appoint a subagent by executing Form 2678 with the subagent and obtaining IRS approval. The approved subagent must file under its own EIN and attach Schedule R to allocate amounts among the original agent's employer-clients. The employer, agent, and subagent all remain liable for the taxes due.

Ruling snapshot

• Question: How does a Section 3504 agent differ from a payroll service provider, and may the agent appoint a subagent?
• Outcome: Advice given: an approved Form 2678 permits a Section 3504 agent to appoint a subagent, with all parties remaining liable.
• Key authorities: IRC § 3504; Rev. Proc. 2013-39

Full text (IRS public release)

ID: CCA_2017100312221104
UILC: 3504.00-00, 3504.01-00

Number: 201746023
Release Date: 11/17/2017
From:
Sent: Tuesday, October 03, 2017 12:22:11 PM
To:
Cc:
Bcc:
Subject: RE: Section 3504 Agent and Rev Proc 2013-19

Hi --------

We try to be very precise with terminology. We refer to a person with an approved
Form 2678 as a Section 3504 agent or as an agent with an approved form 2678, but not
a payroll service provider (PSP). A PSP files employment tax returns using the EIN of
the employer (not its own EIN.) So, if a PSP had 1000 clients, it would prepare 1000
Forms 941 – one for each of its clients.

On the other hand, a Section 3504 agent files employment tax returns using its own EIN
and allocating amounts to each employer/client using a Schedule R attachment. So, if a
Section 3504 agent has 1000 clients, it files one Form 941 and attaches to the Form
941 a Schedule R listing each employer/client and the wages/taxes paid on behalf of
each employer/client.

It seems like the situation described in the emails below relates to a Section 3504 agent
despite the reference to a PSP. Under section 8 of revenue procedure 2013-39, a
Section 3504 agent can appoint a subagent by executing a Form 2678 between the
agent and the subagent and having it approved by the Service. Once approved, the
subagent is required to file employment tax returns using its EIN. The subagent would
also be required to attach Schedule R to its aggregate Form 941 allocating to each
employer/client of the original agent their share of the wages and taxes from Form

941. The employer, agent, and subagent all remain liable for taxes due.

I hope this helps. Please let me know if you have further questions.

Thanks,

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