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Shave employment taxes on shared employees

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Maybe you’ve acquired separate companies or you split off a subsidiary from your initial operation. In either event, you own two or more business entities on the books.

Potential problem: If some of the employees work for more than one of the companies, you could be paying more employment tax than required.

Strategy: Assign a “common paymaster” for payroll matters. If you pay the shared employees from a single source, you won’t overpay employment tax anymore. And this makes life easier for the employees, too: They don’t have to wait until they file their tax returns to recoup their shares of any excess taxes (see box below).

It’s a win-win situation for employers and employees. Nobody loses ... except maybe Uncle Sam.

Here’s the whole story: Both employer and employee must pay an equivalent share of FICA employment tax. For 2009, the Social Security portion of the tax is 6.2% against a wage base of $106,800. (This wage base is adjusted annually.) Any amount above the wage base is still subject to the 1.45% Medicare portion of the tax. So, the entire FICA tax in 2009 for each employee is 7.65% on the first $106,800 of wages; 1.45% above that.

With a common paymaster, you pay less employment tax for shared employees who earn more than the wage base.
Example: You own a development company with a marketing subsidiary. The top marketing officer works for both companies and earns a total of $130,000 a year. She earns $100,000 from the development company and $30,000 from the subsidiary.

Because neither company pays the officer more than the annual wage base, both companies are responsible for employment taxes on her wages. The development company pays $7,650 for the year (7.65% of $100,000) and the subsidiary pays $2,295 (7.65% of $30,000) for a total of $9,945. The officer must pay an equivalent share of the FICA tax herself via withholding from her wages.

Better idea: If you designate the development company as the common paymaster, all of the officer’s wages are paid from a single source. Now the combined business operation owes employment tax of $8,506 on her wages of $130,000 (7.65% of $106,800 and 1.45% of $23,200, the difference between $130,000 and $106,800). That’s a savings of $1,439 ($9,945 – $8,506) for just one employee.

What about the employee? Normally, she would overpay employment tax for the year and file for a refund on her tax return. With the common paymaster arrangement, she gets the use of the money right away instead of “lending” it to Uncle Sam.

To qualify for this tax break, you must meet three requirements:

  1. At least 50% of the officers of one company must also be officers of the other company.
  2. At least 30% of the employees of one company must work for the other company.
  3. One or more of the companies must own at least 50% of the other companies.

Tip: All employees, including those who work for only one company, are paid by the common paymaster. The primary company should draw the paychecks on a single account and keep the appropriate records.

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