Are You Leveraging Payroll Tax Savings During an M&A Deal?

At a glance

• The main takeaway: The payroll department is often excluded from the early planning stages of an M&A deal or internal reorganization. However, hidden value, both in cash and employee satisfaction, can be found in payroll.
• Assess the impact: The best way to guard against the unnecessary expense of double taxation is including payroll tax considerations early into an M&A process.
• Take the next step: Aprio’s Employment Tax team can help you identify and leverage potential payroll tax refunds and avoid double taxation.

Schedule a free consultation today to learn more.

The full story:

During any merger, acquisition, or internal reorganization there are a myriad of corporate considerations on the tax and non-tax front. In addition to all the internal resources utilized, there are typically attorneys, accountants, and outside consultants engaged to help the organization overcome the numerous hurdles it will encounter as it makes its way through the merger and acquisition (M&A) process. 

However, there is one department that is often left out of the internal planning stages of many transactions, and where hidden value, both in cash and employee satisfaction can be found —payroll.In many cases where employees are transferring between legal entities as a result of an M&A transaction, there can be significant savings available if handled properly on the front end.

The good news is, even if payroll does not have an early seat at the table to facilitate prospective savings, refunds could still be available for three or more years after the transaction closes. There are certain payroll taxes that have an annual maximum cap or taxable wage base applied. Social security ($168,600 in 2024), Federal Unemployment Tax ($7,000), and State Unemployment Insurance (range from $7,000 – $67,600) all have annual limits. In many cases, compensation paid to employees that reached the annual limits pre-transaction can carry over after an M&A transaction closes, so that the successor entity does not have to restart the wage base from dollar one. 

Sometimes the ability to take advantage of these carryover opportunities is hampered by system limitations, lack of proper guidance and planning, or simply not enough hours in the day. In this article, we will explore some thoughts on prospective planning and retroactive recovery.

What is successorship?

The definition of successorship in the context of taxable wage continuation often differs between federal and state.

Federal-Level Successorship

In the federal employment tax space, successorship for wage base continuation is generally achievable when an entity acquires all the business and operations of a prior entity or a segregable portion of a business (think buying a division of a company, or a specific warehouse or manufacturing site), and continues the operations of that acquired business post-transaction. This is, of course, a simplified definition, and the specifics of any transaction would need to be reviewed for applicability. However, in many cases, a successorship position is available to the buyer at the federal level if carefully considered and acted upon during transaction planning.

Meeting the federal definition of a successor employer allows for the continuation of the Social Security and Federal Unemployment Tax Act (FUTA) wage bases, which could provide significant transactional savings as well as increased employee satisfaction (by not having to pay duplicate taxes) during what is sometimes a stressful time.

State-Level Successorship

At the State Unemployment Insurance (SUI) level, things can get a little trickier. While some states, like New York, require successorship in the event of any transaction, other states, like Florida, require agreement between predecessor and successor in order to allow for such a position. 

What must also be considered at the SUI level is that, in some cases, a successor employer taking advantage of the wage base carryover may also be liable for the predecessor’s SUI tax history. As a result, a buyer could get a short-term gain by carrying over the year-to-date (YTD) taxable wage base, but then be saddled with long-term tax increases in the event of poor SUI history. 

Both factors need to be weighed, especially in those states that provide the buyer options as to whether to succeed or not. Also, some states will allow for the successor position for wage base continuation and not require the buyer to take on the SUI history of the seller. 

One important note: any transaction in which the buyer and seller are commonly owned or controlled requires the transfer of SUI history, including timely transactional reporting.

Taxable wage base transfer planning

During the planning stages of any transaction, whether an outside acquisition or internal reorganization, proper coordination and research can result in significant savings and make life much easier for employees. 

One of the important areas that is often missed, is the consultation with professionals who have a deep knowledge of employment tax to help determine whether federal and/or state successorship applies. Too often, companies will rely on a third-party payroll vendor, or a payroll department lead who understands the mechanics of payroll and the system operations but is not deeply embedded in the tax side. Successorship positions and decisions can be complex and, in the case of SUI, extremely time sensitive and fact-specific.

In some cases, a buyer will need to negotiate in a purchase agreement the ability to get YTD payroll information by employee and historical SUI tax records in order to take advantage of carryover and SUI tax successorship provisions. This is not usually a controversial ask; it is just often overlooked until after the deal closes, when cooperation outside of the original agreement may wane. 

Prior year refunds

Due to system limitations, lack of planning in the space, or just a time crunch in closing the deal, taxable wage bases are commonly restarted when they do not need to be. However, all is not lost, and recovering cash for those prior year transactions may still be available for years after close. 

In most cases, if the company has met the definition of a successor employer and restarted taxable wage bases, refunds of Social Security and FUTA taxes paid are available for up to three years after the employment tax filing deadlines for the year of the deal.

There is, of course, some complexity with these refund filings. Detailed wage information by employee may be needed, and, in the case of Social Security refunds, the employer may be required to attempt to recover such overpayments for employees (though most likely recovered on their own already). However, depending upon the extent of the refund, the dollars might be well worth the effort.

On the SUI side, every state is different in terms of refund deadlines, decisions which may have been made (or not made) as to successorship at the time of the transaction, and the ultimate cost/benefit of the refund versus a future rate increase. 

Once again, if available, the review of the refund potential may be worth the effort it takes to determine viability.

The bottom line

The best way to guard against the unnecessary expense of double taxation and enhance employee satisfaction is planning, which includes payroll tax considerations. 

While obstacles can be overcome to facilitate proper successorship recognition concurrently with a transaction, it will take significant coordination between internal and external professionals and vendors in a timely fashion. However, even if the company cannot get there timely, refund options may still be available after the fact, and can be lucrative depending upon the individual case. 

Potential refunds may be currently available dating back to 2021. If your company has had M&A activity, or even an internal reorganization, it may be worth investigating while there is still time. Aprio’s Employment Tax team understand the complexities that come with payroll taxes and can help you identify and leverage potential tax savings.