There are tax credits and savings all around us, but if you do not know what to look for or have an experienced tax adviser, you may be missing out. One rarely known tax savings is the Successor employer rule. The regulations can be found under IRS Code 31.3121(a)(1)-1(b), and there is a single, small paragraph that makes mention of it in Publication 15 Employer’s Tax Guide, but I will give you the rundown here. If you have purchased or looking to purchase a business, then this is definitely one you do not want to overlook.
Most employer taxes are only paid on wages earned by its employees up to a certain wage limit during a calendar year. This includes taxes such as Old-Age, Survivors, and Disability Insurance (OASDI) with a taxable wage base of $128,700, Federal Unemployment with a limit of $7,000, and a state, such as Florida, with a taxable wage base for unemployment tax of $7,000. Once the employee reaches those respective wage amounts during the year, the employer does not incur any additional tax liability. This is a great incentive to keep turnover to a minimum, but that is not the moral of this story. When a business is sold mid-year via an Asset Purchase (the most common transaction) the buyer pays the employees under their new corporation. As a result, the taxable wage base for each employee starts all over… or does it?
This special Successor employer rule provides an exception to the wage base starting over for tax calculation purposes only. The method of the acquisition is immaterial, but there are three key tests which must be met to qualify, and they are;
- During the calendar year, the Successor acquired substantially all of the property used in a trade or business, or in a separate unit of a trade or business, of the predecessor.
- The employee was employed in the trade or business of the predecessor immediately before the acquisition and immediately after the acquisition.
- The wages were paid during the calendar year in which the acquisition occurred and prior to the acquisition.
The savings can be significant, so let’s break down the numbers with two fair assumptions.
- The sale took place after the employee earned at least $7,000 at the predecessor.
- The successor employer has a state unemployment tax rate of 2.7%.
Based on this, the Successor employer will not have any unemployment tax liability for the remainder of the year. This is a savings of $189 per employee for state unemployment and $42 for federal unemployment. If there was a highly compensated employee who would have earned greater than $128,700 between the old and new employer, then there would be a savings of 6.2% of the amount in excess of that. A large savings in-itself, but even without that, a company with just 10 employees could recognize a tax savings of $2,310.
I see only two downsides to obtaining this tax savings. First would be acquiring the necessary year-to-date taxable wages paid by the predecessor, and second, finding a payroll service that can handle the calculation. The complexity arises where the Successor needs to be able to accommodate the tracking of the year to date wages paid for employer tax purposes, including the wages paid by the predecessor, simultaneously with tracking those wages actually paid by the Successor separately. This is due to the Successor needing to prepare a W-2 form at the end of the year only for the wages it actually paid.
In conclusion, this is a tax savings measure that can translate to a large amount and should not be overlooked.
While I make every attempt to ensure the accuracy and reliability of the information provided in this article, the information is provided “as-is” without warranty of any kind. PayMaster, Inc or Romeo Chicco does not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. Consult with your CPA, Attorney, and/or HR Professional as federal, state, and local laws change frequently.