Employment Tax Refunds: Maximizing Your Payroll Tax Savings 

Organizational changes, whether large-scale restructuring or simply changing payroll vendors, can result in companies inadvertently making duplicate employment tax payments. Determining whether a company is eligible for a refund in this case and the methodology to recover those funds can be complex, leading many third-party payroll providers and internal payroll departments to avoid the process altogether. The potential value of the refunds can be lucrative for many companies and could be worth pursuing, made easier with the help of a knowledgeable tax advisor.

Time is ticking, however, to claim these refunds. The statute of limitations for prior period federal employment tax refunds is three years from the due date of filing for the applicable tax year, which means refunds for 2021 must be claimed by April 15, 2025. For organizations eligible under the Federal Unemployment Tax Act (FUTA), the deadline for refunds is even earlier, by Jan. 31, 2025. State Unemployment Insurance refunds are generally held to the same three-year window, though it ultimately varies by state.

To determine whether your company may be eligible and how to claim prior year employment tax refunds, let’s break this process down into three key steps.

Step 1: Determine Successorship 

The key eligibility requirement for most payroll tax refund opportunities is meeting the definition of successorship for employment tax purposes. This will vary in terms of eligibility for Social Security/FUTA or State Unemployment Insurance (SUI) successorship. 

• Social Security/FUTA Successorship

Pursuant to IRC Section 3121(a)(1), successorship occurs when an employer (the successor) acquires substantially all of the property of another employer (the predecessor), or used in a separate unit of the predecessor, and the successor hires/retains some portion of the predecessor’s employees immediately after the acquisition. In addition, federal guidance also allows for successorship in the event that assets are not purchased or moved in the transaction and only employees are acquired, but the use of the assets is contracted for.

In the event the definition of successorship is met, the successor has the ability to retroactively “carry over” the year-to-date taxable wages paid to transferring employees and take credit for the taxes paid on behalf of both the employer and the employee. If those taxes were duplicated post-transaction, they can be recovered in the form of a refund.

• State Unemployment Insurance (SUI) Successorship

The definition of successorship varies from state to state, as do statutes of limitations and deadlines for requesting successorship. This can open the door for additional risks that a company should assess before pursuing, such as whether wage base continuation is permitted without requiring the buyer to take on the seller’s tax liabilities. In the event of an internal transfer of employees between legal entities, successorship almost always applies and is generally mandatory, with some notable exceptions. However, in many cases, payroll systems will duplicate taxes paid, and refunds should be pursued.

Step 2: Consult An Advisor

Many companies rely on a third-party payroll vendor or internal payroll department to determine whether successorship applies. However, successorship decisions can be complex and time sensitive. Extensive knowledge of employment tax laws at the federal and state levels is necessary to ensure important details are not overlooked that could significantly benefit or harm the company’s tax position.

Step 3: File Your Refund

If a 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.

Detailed wage information by employee will likely be needed, and, in the case of Social Security refunds, the employer may be required to recover overpayments for employees if they have not recovered them on their own (although this is rare).

For SUI refunds, each state’s deadline and filing requirements are unique, as are the requirements to accept predecessor tax liability, so reviewing the cost/benefits on a state-by-state basis is critical.

Next Steps

While exploring the employment tax refund applicability in both the federal and state context, it is important to determine your company’s eligibility and capture the applicable refunds through the amended return process. With just a few short months before the first deadline for prior year refunds, it is paramount to get help from a trusted advisor as soon as possible.

Looking forward, be sure to research and prepare for potential acquisitions, mergers, or internal reorganization to avoid double taxation, maximize savings, and reduce headaches in the future. Facilitating proper successorship concurrently with a transaction will take significant coordination between internal and external professionals and vendors but is possible with proper preparation and research.

Strengthen your business with Aprio’s comprehensive Employment Tax Advisory Services. From federal and state payroll tax compliance to navigating merger and acquisition transitions, our skilled team provides proactive solutions tailored to your needs. Let us help you stay compliant and streamline payroll operations so you can focus on future growth. Schedule a consultation today and achieve what’s next at Aprio.com.

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