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Payroll Tax Savings Opportunities

After the Great Recession of 2008, many corporations have consistently gone through Merger & Acquisition (“M&A”) activity. The Institute for Mergers, Acquisitions and Alliances (“imaa”) recently released a study reflecting a significant increase in this type of activity and below is a graph reflecting their findings:

There are various business reasons why corporations acquire or merge with other entities. Acquiring or merging with companies is generally to grow the business, acquire companies in the same industry, or even merge with companies that would fit their business model.

However, many companies that go through M&A don’t realize the opportunities out there from a payroll tax perspective. Usually the Payroll Department is last to find out about bringing on employees that were acquired to a newly established EIN or transferred to one of their subsidiaries or parent company.

Payroll is scrambling to report these employees under one of the company’s EIN or a newly established entity timely, but payroll can’t do anything until an EIN is created with the IRS, registration with the Secretary of State, applying for state unemployment and withholding account numbers, payroll systems in place, etc…

Due to the time or system constraints, many employers don’t consider payroll compliance requirements (i.e. reporting M&A activity with the state agencies) and SUI, FUTA and FICA wage base continuance. By using the wages paid by the selling employer to determine when the acquired employees attain the annual taxable wage bases (for FICA, FUTA, and SUI), the acquiring employer can realize meaningful savings if the transferred employees restarted these payroll taxes.

This is where Thomas & Company can assist. We ensure that proper management of historical and current M&A compliance obligations are met with the state agencies and that all potential tax saving opportunities are considered at the state and federal level.

We offer the following services for our current and prospective clients:

Comprehensive Unemployment Tax Review

After reviewing and documenting all state unemployment accounts, we will research account history with state agencies and provide an executive summary of findings to the client. We will make sure unemployment accounts are in good standing and identify outstanding balances, delinquencies and overpayments. In the states where it is permissible, Thomas & Company will submit applications to have overpayments refunded to you and we will advise you of tax strategies available to ensure all future payments are accurate.

Merger & Acquisition Compliance Services

When an asset purchase, merger, internal reorganization or acquisition of a part of a predecessor’s business unit occurs, employers are required by state unemployment agencies to disclose information relating to the transaction. Reporting requirements are complex and vary by state. Any undisclosed and erroneous reporting can result in penalty tax rates, tax rate increases, penalties and/or interest charges or missed savings opportunities. Clients who retain Thomas & Company as their Unemployment Cost Management provider receive this service at no additional cost, while non-client engagements are performed on a project basis.

Tax Saving and Refund Opportunities

When a mid-year transaction occurs, employers may be eligible to consider the year-to-date SUI wages paid by the predecessor. Thomas & Company works directly with the state agency to ensure the tax rate transfers are processed and can prepare amended quarterly SUI returns. We can also amend Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return) and Form 941 (Employer’s Quarterly Federal (FICA) Tax Return) if the transaction qualifies as a Predecessor/Successor Relationship under state and IRS rules. Thomas & Company will continue to track all SUI, FUTA and FICA credits until refunds are secured, and ensure clients follow all statutory requirements of the state agencies and IRS.

If you have historical or upcoming transactions and would like a review of your unemployment tax options and tax recovery opportunities, please contact Josh Kendall at (615) 620-1821 or via e-mail.

As always, if there are any questions please do not hesitate to contact us.

Pre-Acquisition Planning for State Unemployment Taxes

While state unemployment insurance (”SUI”) taxes rarely drive a company’s decision relating to the structure of a merger, acquisition, internal workforce reorganization/restructuring, or divestiture (“M&A”) transaction, pre‐acquisition planning can help shape the timing and final organizational structure that can result in significant tax cost savings.

An acquiring employer has the responsibility, perhaps obligation, to request and obtain sufficient data from a selling employer to assess material concerns, mitigate SUI tax rate risk, and ease the payroll integration process once the transaction has closed.

Perform Due Diligence!

Due diligence is the investigation and discovery of opportunities, risks, and synergies associated with a transaction. From a SUI tax perspective, due diligence efforts should be strategically focused on areas that can have a material financial impact on an acquiring employer, such as:

  • States with significant taxable payrolls
  • SUI tax accounts with very high or very low SUI tax rates
  • Assigned penalty tax rates and the reason for such rates
  • Significant reductions in workforce
  • Debits and/or credits on accounts and the reason for such adjustments
  • Unreported historical M&A transactions
  • Improper payroll reporting practices (e.g., reporting to incorrect state or under an incorrect legal entity)

Design a Plan to Minimize Risk…

Conducting a SUI tax rate impact analysis allows the acquiring employer to quantify the financial impact a transfer of experience (i.e., tax rate) might have on future SUI tax rates and related unemployment tax costs in the current and future years. The analysis enables the acquiring employer to assess:

  • Available transfer of unemployment rating experience options (i.e., required, prohibited, or optional)
  • Revisions to tax rates and when those revisions will become effective
  • How revised rates will impact SUI tax costs
  • Ability to change the effective date of the acquisition (e.g., 01/01 vs. 12/31) to obtain the best financial results
  • Impact on existing and future statutory elections (e.g., voluntary contributions and joint accounts)

…and Maximize Tax Cost Savings

The language used in an acquisition agreement can have material financial implications to an acquiring employer. Such agreement language may influence:

  • An acquiring employer’s ability to access a selling employer’s pre‐acquisition payroll tax records. By using the wages paid by the selling employer to determine when the acquired employees attain the annual taxable wage bases (for FICA, FUTA, and SUI), the acquiring employer can realize meaningful savings by not duplicating employment taxes.
  • An acquiring employer’s ability to obtain a better SUI tax rate. By having the selling employer agree, pre‐acquisition, to any requests by the acquiring employer to transfer SUI rating experience, the acquiring employer can confidently make assumptions as to financial outcomes.
  • An acquiring employer becoming responsible for the payment of undisclosed, contingent, or delinquent SUI tax liabilities of the selling employer.

Thomas & Company assists employers during the pre‐acquisition planning phase by reviewing and assessing data for material unemployment tax risks and potential opportunities.

To speak with one of our UI Tax Analysts related to an upcoming M&A transaction or internal workforce restructuring, please contact Josh Kendall at (615) 620‐1821 or via e‐mail.