Consolidating Payrolls with Agents or Common Paymasters

Large businesses may be made up of dozens of entities, each with its own payroll.  Where employees move between these various member entities, the business may be subject to over collection of payroll taxes.  Two methods by which certain employers may be able to consolidate payrolls and potentially avoid over collection of taxes is through a common paymaster or Section 3504 agent.

 Common Paymaster

If two or more related corporations employee one individual at the same time, and pay the individual through a so-called “common paymaster,” the corporations are considered to be a single employer for tax purposes and pay no more in social security tax that a single employer would pay.

The common paymaster provisions only apply, however, where an employee is concurrently employed by the employers, one of which must also be the common paymaster.  Concurrent employment means that the employee performs services for each entity compensating the employee through the paymaster, not just for the benefit of the group of employers.  Thus, a common paymaster is not a practical method of consolidating payrolls in situations where employees are typically only employed by one member entity at a time.

Section 3504 Agent

A more widely available method of consolidating payrolls is to designate a payroll agent under 26 U.S.C. § 3504.  An employer may request approval to have an agent who pays or controls payment of the employee’s wages file returns and make deposits or payments of Federal Insurance Contributions Act (FICA) taxes, Railroad Retirement Tax Act (RRTA) taxes, income tax withholding, or backup tax withholding.  Employers generally cannot appoint an agent with respect to Federal Unemployment Tax Act (FUTA) taxes.

To request approval of an agent, employers must submit Form 2678.  Approval of an agent can be requested as to some or all employees, and for some or all purposes.  If the employer anticipates paying any wages to employees, it must indicate that the agent designation is for only some of its employees and continue to file returns with regard to those employees.

Once approved, the agent must file one “aggregate” return (under its own name and employer identification number) for each return period reporting the wages and employment taxes on wages paid by the agent to its employees for each employer for whom it is authorized to act.  The agent must complete and attach to the aggregate return a schedule allocating the wages, taxes, and payments reported on the return to each employer, identified by name and EIN.  The agent is responsible for maintaining records showing what was paid on behalf of each employer, and the employer is in turn responsible for maintaining records of the wages paid by the agent to its employees.

Provisions of law applicable to the employer, including penalties, are made applicable to the agent, and remain applicable to the employer as well.  An agent designation may be revoked by the same Form 2678, or independently by the IRS.


Jonathan Hunter, Esq
Rudman Winchell