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Shave FICA tax bill on shared employees

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in Small Business Tax,Small Business Tax Deduction Strategies

Suppose you’ve carved a subsidiary out of your main operation, so now you officially own two business entities. Potential problem: If certain employees work for both companies, you could be paying more employment tax than you’re required to under the law.

Strategy: Assign a “common paymaster” to handle employment taxes. If you pay the shared employees from a single source, you won’t overpay FICA tax anymore.

Here’s the whole story: Each employer and employee must pay an equivalent share of FICA employment tax. For 2012, the OASDI portion of the tax is 6.2% against a wage base of $110,100. (This assumes that the 2% payroll tax holiday for 2011 isn’t extended or modified for 2012.) Any amount above the wage base is still subject to the 1.45% HI portion of the tax. Thus, the entire FICA tax in 2012 for each employee is 7.65% on the first $110,100 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: Save thousands with one payer

Brad Jolly owns a consulting firm with a subsidiary. His top officer, Eva Garcia, works for both companies and earns $150,000 a year. She earns $100,000 from the consulting firm and $50,000 from the subsidiary.

Because neither company pays Eva more than the annual wage base, both companies are responsible for employment taxes on her wages. The consulting firm pays $7,650 for the year (7.65% of $100,000) and the subsidiary pays $3,825 (7.65% of $50,000) for a total of $11,475. Eva must pay an equivalent share of the FICA tax herself.

Better idea: If Brad designates the consulting firm as the common paymaster, all of Eva’s wages are paid from a single source. So, the business owes FICA tax of $9,001 on her wages of $150,000 (6.2% of $110,100 and 1.45% of $150,000). That’s a savings of $2,474 (11,475 minus $9,001) for just one employee.

Normally, Eva would be overpaying FICA tax for the year and have to file for a refund on her tax return. Now she can use the money instead of “lending” it to Uncle Sam.

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

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

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

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