Suppose business is booming and you've been able to gobble up one or more of your competitors. Your work force is growing, but that means you'll need to shell out more in payroll taxes.
Strategy: Don't overpay taxes for the acquired companies' employees. It's a common problem in such situations.
If you continue to employ the same workers, the payroll taxes paid by the former employer can reduce the amount that you'll need to pay. It's like getting a payroll tax "discount" for money paid by another employer.
Background: When an employee works for two different companies during the year, each company must pay the 6.2 percent portion of the employee's Social Security tax, up to the annual wage base ($90,000 for 2005). If the employee's total pay from both companies tops $90,000, the employer cannot recoup the excess Social Security tax. (All wages are subject to the 1.45 percent Medicare tax.)
However, if you acquire a company during the year, you can count the wages paid by the other company toward each employee's $90,000 Social Security wage base. To qualify for that tax break, you must obtain substantially all of the property used in the prior employer's business.
How much can you save with this payroll tax break? The figures can be staggering. Let's say your business takes over two companies that have 25 employees each. If the average employee had already earned $30,000 this year, you'd save a whopping $93,000 in Social Security tax (50 employees times $30,000 times the .062 tax rate).
Note: You can benefit from this tax rule even if you're acquiring or consolidating your own subsidiaries.
Example: Smith Corp. owned five subsidiaries that it wanted to consolidate. It formed a limited partnership and named itself as general partner. Then, the limited partnership absorbed all the subsidiaries through mergers, liquidations and asset transfers.
The IRS said each subsidiary qualified as a separate unit of Smith Corp.'s business. Result: The limited partnership qualified as a successor employer, so it received payroll tax credit for all the wages paid by the subsidiaries. (IRS LR 9315007)
Tip: When a successor employer absorbs another employer through a merger or consolidation, it should provide a single W-2 for each employee for the year. If the two employers remain separate entities, each one must still provide its own W-2s.