Thank you to our guest blogger, Peter Del Monaco, for his second installment about employment tax matters – this time related to a merger/acquisition transaction. Click here for Peter’s previous article.
Employment Tax Refunds, Mergers & Acquisitions
The occurrence of a merger, acquisition or divestiture can significantly impact a company’s employment tax liabilities and affects many within an organization. Favorable employment tax attributes of an acquired or merged entity often may be preserved, and refund opportunities may exist as a result of prior mergers, acquisitions, and/or divestitures. However, many employers often overlook these issues for a host of reasons – registration at the state and local level, ensuring that the new employees receive their paychecks in a timely fashion and that their benefits are accurately carried forward.
With the myriad of issues that need to be addressed as a result of the immediate transaction, many employers overlook the employment tax savings that can be obtained. All that is required is for someone to focus on that specific issue and provide the guidance necessary to create value where none was perceived.
FICA & FUTA
Under federal law, a predecessor/successor or absorbed/resultant entity relationship may exist which would allow the successor or resultant entity to obtain credit for the Federal Insurance Contribution Act (FICA) and Federal Unemployment Tax Act (FUTA) taxable wages previously paid by the predecessor/absorbed entity. The federal statute of limitations for recovery of these monies is three years. For calendar year 2021 transactions, the deadline for recovery is April 15, 2024. However, as previously mentioned, with the many other issues that come up as a result of the immediate transaction, oftentimes many employers overlook the employment tax savings that can be obtained. But luckily, companies can go back retroactively to obtain the savings.
State Unemployment Taxes
Many state unemployment agencies also have strict rules and regulations in their statutes regarding acquired or merged entities (“payrolling” laws). These regulations define who the eligible employer(s) in the transaction could be, the tax rate transfer and wage credit options available to a successor/resultant entity in claiming the state unemployment experience and the taxable wages of the predecessor/ absorbed entity.
The statutes of limitation vary from state to state but usually are triggered from the date of acquisition or merger. A detailed knowledge of the various statutory guidelines is essential in achieving the optimum savings.
Payroll Taxes in Year of Acquisition
Lastly, IRS Revenue Procedure 2004-53 provides the two methods by which a predecessor (seller) and successor (buyer) employer can report payroll in the year of an asset acquisition that involves the transfer of employees.
Under the “standard procedure,” the predecessor performs all reporting duties for the wages and compensation it pays. Correspondingly, the successor employer reports only the wages it pays. Each employee that becomes an employee of the successor employer necessarily receives two W-2s for the tax year, one from predecessor and one from successor, each covering different parts of the year
Under the “alternate procedure,” if the parties agree, predecessor is relieved of all reporting obligations for the transferred employees, and successor assumes the obligation of filing W-2s covering the entire year. Each employee that becomes an employee of the successor employer receives one W-2 covering the entire year. It should be noted, agreeing in the purchase agreement to the payroll method to be used reduces confusion with third party administrators or internal payroll management down the road at tax filing time.
The Process for Achieving Tax Savings and/or Refunds
- Evaluate the appropriateness of the predecessor/successor relationship for FICA, FUTA, and SUTA purposes
- Quantify wage credit refunds or the potential wage duplication involved in the transaction
- Analyze the unemployment tax rates of the affected entities
- Consult with client regarding the transfer of the unemployment experience rate from predecessor to successor; Form W-2 filings; Forms 940 and 941 returns
- Develop correspondence for federal and state tax agencies
- Prepare the appropriate registration forms for federal, state and local agencies, if applicable
- Obtain all pertinent payroll tax data and wage tax detail to ensure achieving favorable tax results
- Act as liaison for client with third party payroll administrator and state and local taxing authorities
How Can We Help?
If we know when the transaction occurred, what kind of transaction it was – merger, asset acquisition, stock acquisition, reverse merger, etc., and how many employees were involved, we can generally relatively easily determine what the potential employment tax savings might be. Contact us to schedule a complimentary consultation regarding your post M&A employment tax matters.
About Peter Del Monaco and ETS4U
Peter and his company ETS4U specialize in employment tax services and can provide practical value-added solutions to help clients manage their payroll tax responsibilities by reducing administrative time and effort, identifying and implementing tax saving strategies and eliminating and/or lessening potential tax liabilities.
