On May 31, the IRS released a legal memorandum, ILM 201922026, regarding the information return obligations of a common law employer when it appoints a pay agent in the middle of a calendar year.  In general, an employer may appoint a pay agent under section 3504 by using IRS Form 2678 (Employer/Payer Appointment of Agent) to appoint an agent.  An agent includes a fiduciary, agent, or other person (collectively an “agent”) that has control, receipt, custody, disposal, or otherwise pays the wages of an employee or group of employees, employed by one or more employers.  An agent is appointed to perform certain specified acts required by employers.

The memorandum focuses on the treatment of an employer that appoints an agent to pay wages during the year.  The employer pays the wages for the first three quarters of the year, and then the agent pays the fourth quarter wages for all employees under the authority of an IRS approved Form 2678 filed by the employer.  The employer files Forms 941 for the first three quarters of the calendar year, and the agent files an aggregate Form 941 for the fourth quarter to report wages paid on behalf of the employer (along with any wages paid on behalf of other employers) with an attached Schedule R (Allocation Schedule for Aggregate Form 941 Filers).  The Schedule R is used to allocate the aggregate information reported on the agent’s quarterly Form 941 to each client—wage and tax information is specifically apportioned to each employer by EIN on the Schedule R.

The memorandum concludes that the employer should issue Forms W-2 for the wages it paid during the first three quarters of the year using its EIN, and the agent should issue Forms W-2 for the wages it paid to the employer’s employees for the fourth quarter under the agent’s own EIN.  When the appointed agent issues the Forms W-2, it is instructed to insert its name followed by “Agent for [name of employer]” in the space for the employer’s name and address (box c).

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Photo of Michael M. Lloyd Michael M. Lloyd

Michael Lloyd practices in the areas of tax and employee benefits with a focus on information reporting and withholding on cross-border payments (e.g., Forms 1042 and 1042-S) and Foreign Account Tax Compliance Act (FATCA), backup withholding, employment taxation, the treatment of fringe benefits…

Michael Lloyd practices in the areas of tax and employee benefits with a focus on information reporting and withholding on cross-border payments (e.g., Forms 1042 and 1042-S) and Foreign Account Tax Compliance Act (FATCA), backup withholding, employment taxation, the treatment of fringe benefits, cross-border compensation, domestic information reporting (e.g., Forms W-2, 1099, 1095 series returns), penalty abatement, and general tax planning and controversy matters. Mr. Lloyd advises large U.S. and foreign multinationals regarding compliance with information reporting and withholding issues, as well as a range of other federal and state tax issues.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.