Employment tax responsibilities of designated payer agents

New rules clarify tax responsibilities when an employer designates an agent to pay its employees.

The IRS issued final regulations on the liability for employment taxes when an employer designates an agent under a “service agreement” to pay its employees and to satisfy its employment tax obligations instead of following normal IRS procedures to designate an agent. The new rules affect agents such as payroll service providers, employee leasing companies, and professional employer organizations. They adopt, with minor changes, proposed regulations issued in January 2013 (REG-102966-10).

Employment tax liability is generally determined under the Code, and an agreement between an employer and a third party will not alter that liability. However, in some circumstances, a third-party payer may be considered the person responsible for withholding and payment of employment taxes in addition to, or in lieu of, the employer. Under Sec. 3504, if a third party pays wages or compensation to employees who are employed by one or more employers, the IRS can designate that payer to perform acts required of employers under the Code.

Under Sec. 3504, in the case of such a designation, all provisions of law (including penalties) applicable with respect to an employer are applicable to the designated payer, but the employer for whom the payer acts also remains subject to the provisions of law (including penalties) applicable with respect to employers.

The final regulations apply to situations in which a payer enters into an agreement with an employer/client to perform the employment tax obligations of the employer/client with regard to wages or compensation paid by the payer to individuals performing services for the employer/client, but the payer does not use the established IRS administrative procedures to request authorization to file employment tax returns and performs other acts for the employer/client. Such authorization normally is requested by filing Form 2678, Employer/Payer Appointment of Agent.

Under the final regulations, in any case in which a payer enters into a “service agreement” with an employer/client, the payer will be designated under Sec. 3504 to perform the acts of the employer. For these purposes, “service agreement” means an agreement in which the payer:

1. Asserts it is the employer (or co-employer) of individuals performing services for the employer/client;
2. Pays wages or compensation to the individuals for services the individuals perform for the employer/client; and
3. Assumes responsibility to collect, report, and pay, or assumes liability for, any employment taxes with respect to the wages or compensation paid by the payer to the individuals who perform services for the employer/client.

The regulations were effective March 31.

– T.D. 9662

By Alistair M. Nevius, J.D., the JofA’s editor-in-chief, tax.