Federal and state employment taxes should be considered by any company that completes a merger or acquisition. While these taxes may be considered straightforward and nonstrategic, there are decisions and considerations that should be addressed as part of the acquisition planning.
If your company treats employment taxes related to newly acquired employees as status quo or assumes an automatic transfer of employment tax qualifications, the repercussions can quickly add up. Successor status provisions and state unemployment transfer of experience should be part of every merger and acquisition (M&A) discussion and post-acquisition plan.
Successor status provisions
During any merger or acquisition, your company should look into the successor status provisions for three major employment taxes:
- Old-age, survivors and disability insurance (Social Security)
- Federal Unemployment Tax Act (FUTA) tax
- State Unemployment Tax Act (SUTA) tax
Everyone pays these taxes, but it may not be clear how their calculation is affected by employee acquisition. It all comes down to the taxable wage base. Employers must withhold or pay these taxes, up to the taxable wage base, for each employee during each calendar year. Once an employee’s wages exceed the taxable wage base for each tax, wages are no longer subject to these taxes for the remainder of the calendar year. This applies to all new hires, whether or not the employee worked for other employers during the calendar year; the taxable wage base begins anew with each employer.
In the case of a merger or acquisition, however, the rules are different. In most cases, successor status provisions allow an acquiring company to consider the taxable wages established by the acquired company for those employees who continue their employment. In effect, this allows the new hire of the acquired company to be treated as an existing hire through the use of a taxable wage base credit equal to the wage base accrued under the acquired company. While provided in the statute, this credit is not automatically applied by the IRS or the states. You must meet the qualifying criteria, which vary by jurisdiction, and calculate the credit for each individual.
If your company is involved in a merger or acquisition, it may be beneficial to work with an employment tax specialist to make certain you are effectively applying the successor status provisions to prevent overwithholding and overpayment of employment taxes.
Transfer of unemployment experience ratings
SUTA tax rates are based partially on a company’s unemployment history during a period of time. When two companies combine, the transfer of unemployment experience ratings and state successor status provisions can affect a company’s SUTA taxes.
As with the taxable wage base credit, the management of this state unemployment tax is not as straightforward as it may first seem. Experience transfer rules vary by state and can differ based on whether a company acquires an entire company or only a division of a company. You will need to conduct a detailed state unemployment transfer analysis to determine the additional costs or savings based on the particular state’s transfer of experience rules and the type of transaction.
This type of analysis will allow you to make sure you are not accidentally in violation of the SUTA Dumping Prevention Act of 2004, which levies heavy penalties against companies and consultants who attempt to obtain more favorable state unemployment experience rates through creative restructuring. When two companies merge, it is easy for missteps to occur in SUTA tax calculations, and these missteps can lead to increased SUTA tax rates, assessments and even criminal prosecution. Proper evaluation of the unemployment experience transfer rules at the beginning of a merger or acquisition may save your company significant headaches down the road.
Better early than late, better late than never
If you think you have overlooked an employment tax opportunity during recent M&A activity, it may not be too late to act. Each taxing jurisdiction has a statute of limitation for claiming a refund for overpaid employment taxes or for transferring an unemployment experience rate. For federal employment tax purposes, this statute is approximately three years from the close of the calendar year in which the transaction occurred. The statutes of limitation for SUTA tax refunds vary by state, but generally run from three to five years. Statutes of limitation for state unemployment transfer provisions also vary by state, but most states allow between 60 and 365 days from the date of the transaction.
Review your recent and future M&A activity today and make sure that employment tax planning is part of the conversation.