Section 3504 agent
A Section 3504 agent is a payroll agent authorized by the IRS to withhold, report, and pay employment taxes on an employer’s behalf, with both parties remaining liable.
Internal Revenue Code section 3504 lets an employer appoint an agent, via Form 2678, to handle employment tax duties. The critical feature is shared liability: unlike the CPEO arrangement, both the agent and the employer remain responsible for the taxes, so an agent’s failure to remit still lands on the employer.
Many non-certified PEOs operate under 3504 or similar third-party arrangements. The buyer implication is direct: if the PEO is not a CPEO, the IRS can pursue you for taxes the PEO collected but failed to pay. That is the concrete reason financial vetting (ESAC accreditation, audited financials, or CPEO status) belongs in every PEO evaluation.