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Own multiple firms? Slice tax bill for ‘shared’ employees

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in Small Business Tax,Small Business Tax Deduction Strategies

Do you run a business through two or more related companies? These days, it's not unusual for people to own multiple operations. But you could be inadvertently paying more employment tax than required if some of your employees are "shared" by more than one company.

Strategy: Designate a "common paymaster" to handle multiple payrolls. If you pay shared employees from a single source, you won't overpay employment tax anymore.

That makes life easier for employees, too; they won't have to wait until they file their tax returns to recoup any of their excess payments (see box at left).

Logistics: Both employers and employees must pay an equivalent share of FICA tax. For 2005, the Social Security portion of the tax is 6.2 percent up to a $90,000 wage limit. The 1.45 Medicare tax applies to all wages.

That means the employer's share of the FICA tax for each employee is 7.65 percent on the first $90,000 of wages and
1.45 percent on everything after that.

With a common paymaster, you'll pay less payroll tax for shared employees who earn more than the FICA wage base.

'Paymaster' avoids overpayments

Let's say you own a company, plus a marketing subsidiary. One of your marketing managers works for both companies and earns a total of $120,000 in 2005. She earns $70,000 from the main business and $50,000 from the subsidiary.

Since neither company pays the manager more than the $90,000 Social Security wage base, both companies are responsible for payroll taxes on her wages. The parent company pays $5,355 for the year (7.65 percent of $70,000) and the subsidiary pays $3,825 (7.65 percent of $50,000) for a grand total of $9,180. The manager must pay an equivalent share of the FICA herself via withholding.

Better approach: If you designate the parent company as the common paymaster, all of the manager's wages are considered paid from one source for federal employment tax purposes. Now the business owes only $7,320 in employment taxes on her wages of $120,000 (7.65 percent of $90,000 and 1.45 percent of $30,000). That's a tax savings of $1,860 for just one employee.

What about the employee's payments? Normally, she'd overpay employment tax for the year and file for a refund on her
tax return. With this better approach, she gains access to the money right away.

To use a common paymaster, you must meet three requirements: (1) at least 50 percent of the officers of one company must also be officers of the other company; (2) at least 30 percent of the employees of one company must work for the other; and (3) one or more of the companies must own at least 50 percent of the other companies.

Tip: Pay all employees, including those who work for only one of the companies, through the common paymaster. The main company should draw the paychecks on a single account and keep the appropriate payroll records.

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