Inc. magazine reported one the fastest ways to grow your business is to buy another company. But growing your business has payroll implications requiring special attention.
Business owners are taking the advice to heart and in vast numbers are reorganizing, merging, or acquiring competitors in effort to intensify the growth within their companies. The growth creates challenges for the payroll department though. When transitioning employees under the new employer mid-year and having the systems in place to take advantage of the Internal Revenue Service’s (IRS) special predecessor-successor rules.
There is considerable tax savings for organizations that qualify under Revenue Procedure 2004-53. While the IRS provides detailed instructions for predecessors-successor rule in Rev. Proc. 2004-53, the instructions do not provide guidance in how to configure the exception to the general rule in PenSoft Payroll.
A high-level explanation of the special predecessor-successor revenue rule is qualified successor employers can count the wages paid by the predecessor when determining the successor’s Social Security tax and Federal Unemployment Tax Act (FUTA) obligations.
Simply stated the successor gets credit for the wage base accumulated under the predecessor, resulting in a tax savings for the successor employer.
The type of merger or acquisition will determine the appropriate employment tax compliance requirements. Preparation and scheduling adequate time to setup the “special” process is vital to the project’s success. Keep in mind obtaining information from outside third-parties may require a longer timeline. If it is determined your organization qualifies, PenSoft can assist in setting up PenSoft Payroll to properly handle the taxes.
PenSoft Program Consultants are not qualified to assist in making the determination if your organization qualifies for the “special” predecessor-successor rules. We recommend contacting your legal counsel, IRS, and/or the state unemployment agency.
Reduce the potential for delays and frustration by having the following tasks completed before calling Program Support.
- Consult attorney or CPA for the determination of qualification
- State experience rates (if applicable)
- Create wage report spreadsheet listing each employee transitioning to the successor company with the following breakout of information: Social Security taxable wages, Federal Unemployment taxable wages, State Unemployment taxable wages
- Complete onboarding the predecessor company employees
Integrating the data and tax wage bases in PenSoft Payroll is complex. There are multiple steps for creating special income categories and configuring taxes to the “special” wage base limits. We do not recommend tackling the project without the assistance from one of our Program Consultants.
Contact Program Support for the assistance with the following tasks (if applicable):
- Create user-defined income for recording year-to-date wages
- Configure the employer/employee tax deduction(s) wage base limit to support wage continuation
- Configure employees subject to Additional Medicare Tax Withholding Rate
- Determine reports and process for validating data after processing payroll under new configuration
Reconciliation and validation of data are critical to ensuring your company is meeting compliance requirements. Taking the time to complete the validation process helps to identify errors and additional documentation needed to support the “special” calculations. Managing the employment tax of an acquisition can be labor intensive and overwhelming. The responsibility of ensuring all necessary steps have been completed and all compliance requirements have been met is a considerable task even for the most experienced professional.
- Reconcile all affected taxes
- Review employment tax reports to ensure changes are flowing to the reports correctly:Form 941/Form 941D, Form 940, W-2’s, SUTA
Year-end planning can be a daunting task without having to factor in setting up a wage continuation payroll configuration. Advance planning will help to mitigate these issues and ensure an overall successful year-end even if it includes an acquisition. Success is possible when close attention is paid to the details of employment tax issues.
Adjustments made to the configuration of wage bases will transfer over to the following year in PenSoft Payroll. After transferring, remove the check mark to use the employee wage base limits before processing the first payroll in the next year.