Mid Year Entity Transfer Statutory Payroll Tax Cap Resets
Mid-year entity transfers trigger statutory payroll tax cap resets unless the transaction qualifies for successor employer wage base crediting under tax statute.
Standard Procedure Wage Crediting
Meaning
Default method of accounting for payroll taxes where a successor employer starts each transferred worker’s wage base from zero. Standard procedure wage crediting ignores the taxes already paid by the previous owner of the business during that calendar year. It is the baseline requirement under tax law unless a specific election is made to use an alternate method.
This results in the employer paying taxes again on the first several thousand dollars of wages.
Tax Restart
Payroll calculations begin anew the moment a new legal entity assumes the responsibility for the workforce. Through standard procedure wage crediting, the annual limits for social security and unemployment taxes are ignored for the period before the transfer. This often leads to a temporary decrease in the net pay for employees who have already hit their limits elsewhere.
The government receives double payments for the same labor.
Accounting Default
Businesses that do not file a specific agreement with the internal revenue service are required to follow this approach.
Succession Cost
Higher tax liabilities associated with this method are often factored into the valuation of an asset purchase. Standard procedure wage crediting can result in a large one time expense during the first quarter after an acquisition. Management must decide if the simplicity of the default is worth the extra tax spend.
The total cost depends on the number of employees and their average salary levels.