Can a Common Pay Agent Election Help your Business?
By Tom Towson
Are you paying wages under multiple legal entities? If so, a Common Pay Agent may help.
Many employers pay wages under multiple legal entities, typically under each respective common law employer. Depending on the number of legal entities involved, this can be hard on those charged with managing:
And payment of employment taxes associated with the payment of wages
In an effort to reduce this burden, employers often place their responsibilities under a single employer, called a Common Pay Agent.
What is a Common Pay Agent?
The appointment of a Common Pay Agent allows for the consolidation of FICA (Social Security & Medicare), as well as income tax withholding, reporting and remittance under the Agent’s federal employer identification number (FEIN). The Common Pay Agent and an electing employer will be jointly and severally liable for the withholding, reporting and remittance of the employment taxes, including any resulting interest and penalties. The Common Pay Agent does not need to be related to the electing employer. To elect an Agent, employers should submit Form 2678 - Employer/Payer Appointment of Agent to the IRS. Once approved, the Agent would be able to act on behalf of the employers.
What are the Benefits of a Common Pay Agent?
There are several benefits, including:
Single federal Form 941, Employer’s Quarterly Federal Tax Return and equivalent state/local withholding tax returns1
With attached Schedule R, Allocation Schedule for Aggregate Form 941 Filers
Single set of federal Forms W-2/W-3
Consolidated deposits to a single account for each taxing jurisdiction
Decreased effort in treasury, accounts payable and accounting
Greater consistency in payroll processes (e.g., uniform deposit schedules)
It is important to note, that a Common Pay Agent election is purely for administrative simplicity. It does not provide any employment tax savings. This election does not cover your federal unemployment (“FUTA”) and state unemployment insurance (“SUI”) taxes. As such, each employer/payer must continue to calculate, report and remit unemployment taxes under its own individual FEIN and SUI account numbers.
Example of Common Pay Agent Reporting
Do you currently use a Common Pay Agent? Employers that have used a Common Pay Agent for an extended duration should periodically review their election(s). They should ensure that Forms 2678 have been filed with the IRS to reflect any internal reorganizations or M&A activity that may have occurred since its original start date.
Common Pay Agent VS. Common Paymaster
Occasionally, employers incorrectly used the term ‘‘Common Paymaster’’ and “Common Pay Agent” interchangeably. A Common Paymaster exists when an employee:
Works for two or more related employers concurrently
All their work is paid by the Common Paymaster
The employee will maintain an employer/employee relationship with the Common Paymaster, as well as one other related company participating in the arrangement. Both companies will be treated as a single employer for federal employment tax purposes (FICA and FUTA).2 Since the Common Paymaster is considered to be the employer, the need to maintain and file employment tax information on a separate FEIN is eliminated. Furthermore, all record keeping will be completed by the Common Paymaster under its FEIN. In addition, this includes depositing of federal employment taxes.
Unlike a Common Pay Agent, the use of a Common Paymaster is not purely for admin simplicity.
Since a Common Paymaster is treated as a single employer, those employees are only subject to a single annual taxable wage base for FICA and FUTA tax purposes. This is not necessarily the case with the use of a Common Pay Agent. Although some states recognize Common Paymaster arrangements for SUI tax purposes, a majority do not.
Will a Common Pay Agent or Common Paymaster work for your business?
Equifax can assist employers in evaluating and executing both Common Pay Agent and Common Paymaster elections. This can help your businesses gain efficiencies and realize potential tax savings. Contact us to speak with one of our Employment Tax Services pros about both options.
1. Not all state and local income tax withholding jurisdictions allow reporting under a Common Pay Agent. Each jurisdiction should be consulted to determine applicability and if a separate election or other reporting is required.
2. Pursuant to IRC Sections 3121 and 3306 and related Regulations.