Suppose that your growing business is taking over one of your competitors. If you keep some of the company’s employees on the job, your business will be increasing its payroll tax liability. However, the good news is that payroll taxes paid by the former employer may reduce the amount owed for the year.
Conversely if one employer acquires another employer during the year — and it continues to employ some of the same workers — the successor can count the wages paid by the predecessor towards its own Social Security wage base.
Background: If an employee works for two different employers during the year, each employer must pay the 6.2% portion of the Social Security tax up to the amount of the annual wage base of $132,900 for 2019 (up from $128,400 for 2018). The employee can recoup the excess if the total clears the wage base, but neither employer can. All wages are subject to the 1.45% Medicare tax for both employees and employers. Once earned income reaches $200,000 (or $250,000 for married couples) 2.9% rises to 3.8%, without limit.
To qualify for this payroll tax break, the following conditions must be met:
- The successor employer obtains substantially all of the property used in the prior employer’s business (or in a separate unit of the prior employer’s business);
- The employees worked for the predecessor immediately before the acquisition and for the successor immediately after the acquisition; and
- All of the earnings were paid in the calendar year of the acquisition.
The tax savings can be significant. For example, let’s say that your business absorbs two companies with 50 employees. Assume that the average amount of wages already credited is $30,000 per employee. As a result, your company saves $93,000 in payroll tax (50 employees times 30,000 times.062). Obviously, the exact savings varies in each situation. (There could be state and local payroll tax savings, as well.)
Footnote: An employer may benefit from this tax rule even if is acquiring or consolidating its own subsidiaries. The IRS has said that the method of acquisition is immaterial for this purpose.
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Eight Other Payroll Questions In a Merger or Acquisition
1. What is the payroll frequency of the predecessor and the successor firms?
2. What are the policies for vacation, sick days and paid time off?
3. What are the predecessor’s Workers’ Compensation rates?
4. What will the first pay period be under the successor?
5. What states and localities must payroll taxes be paid to?
6. Has the predecessor firm complied with the filing dates for all required payroll tax deposits?
7. Have workers been properly classified as employees or independent contractors? As exempt or nonexempt employees?
8. Are fringe benefits taxable? What are the related IRS reporting and withholding obligations?