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.