Summary: Companies that have experienced M&A activity or internal reorganizations within the past three years may be eligible for refunds on overpaid payroll taxes. Eligible companies should initiate the refund process as soon as possible.
The Lost Dollar of Mergers & Acquisitions
Companies that have experienced internal reorganizations, merged with or acquired other businesses, or, in some cases, even acquired and staffed new projects during the calendar year may qualify for prior period federal and/or state employment tax refunds. Eligibility for refunds will center on whether “successorship” applies, and the likelihood of duplication of taxes occurring often depends on how payroll was processed, whether federal/state taxable wage bases were carried over to new business, and alignment with federal or state successorship rules. In cases where employees transferred between legal entities because of an M&A or similar transaction, there can be significant refunds available retroactively or, if handled properly, prospective savings.
In the bustle of legal and tax strategies of mid-year changes, the ability to take advantage of year-to-date (YTD) payroll tax carryover opportunities is often inhibited by system limitations, lack of proper guidance and planning, or simply time constraints. The good news is, even if these payroll positions are not considered at the time, refunds are available for up to 3 years after the year the transaction closes.
Eligibility for Employment Tax Refunds
Successorship is key to determining refund eligibility for companies that have undergone M&A transactions, as it determines whether wage bases carry over, whether SUI experience rates transfer, and how YTD wages should be treated moving forward.
However, the definition of successorship for employment tax purposes differs across the federal and state levels.
Successorship with respect to federal employment taxes generally hinges on a transaction involving the acquisition of either a) all a prior owner’s business operations and employees or b) the acquisition of a segregable unit or operation of a business, inclusive of that unit’s employees. Federal employment tax laws for both FICA (specifically Social Security) and Federal Unemployment Tax (FUTA) allow for the continuation of the YTD taxable wages by the acquiring employer if successorship applies. State unemployment laws will vary depending upon the state and the nature of the transaction, but they often will follow the same guidelines with respect to taxable wage base transfers, sometimes also allowing for tax rate transfers.
Taxable Wage Base
Arguably the most important consideration for companies interested in claiming refunds on payroll taxes is the taxable wage base—commonly referred to as the “cap” or “limit”—applied to payroll taxes. The taxable wage base is the maximum amount of an employee’s wages per year that are subject to payroll taxes, such as Social Security, FUTA, and State Unemployment Insurance (SUI) taxes.
For reference, here are the taxable wage bases for the 2026 tax year:
| Payroll Tax | Taxable Wage Base per Employee |
|---|---|
| Social Security | $184,500 |
| FUTA | $7,000 |
| SUI | Varies by state |
What does this have to do with refund opportunities? Let’s say an employee’s salary is $200,000 in 2026. With an annual Social Security wage base of $184,500, the employee will reach this wage base at some point during the year. The moment the employee’s wages reach the wage base, no further Social Security taxes should be withheld from that employee or financed by their employer (Social Security taxes both the employee and employer at 6.2%). The same would apply to the FUTA wage base, in which an employer pays FUTA taxes on the first $7,000 each employee makes.
These caps remain true even if the employee changes entities, such as in the case of an M&A transaction, as long as the successorship eligibility threshold is met. The quantification of a refund post-close of an M&A transaction largely depends on whether the successor continued the wage base of each acquired employee or whether they restarted the wage base—which is where the refund comes in.
Where Payroll Taxes and M&A Get Tricky
In many cases, the YTD taxes paid pre-transaction can carry over post-close so that the successor entity does not have to restart the wage base from dollar one. Unfortunately, when payroll is moved to a new system after an M&A transaction, many companies restart the payroll tax wage base at zero instead of carrying over YTD wages. That causes both the employee and the employer to overpay Social Security tax on extra wages ($15,500 in the example above) that should have been exempt.
While the employee can recover their over-withheld portion when filing their personal tax return, the employer cannot recover its portion automatically and must file amended payroll tax returns to claim a refund—otherwise the money is lost.
Despite the potential for refunds, companies often struggle to identify refund opportunities and may even be discouraged from doing so from a workload or technical advice standpoint. Third-party payroll providers, for instance, often do not advise clients to pursue payroll tax refunds or claim them on behalf of their clients, and internal payroll departments may lack the expertise in the eligibility and recovery requirements of tax refunds. Consequently, many companies miss opportunities to recover payroll taxes, even when changes in their structure or staffing create potential eligibility.
Initiate the Refund Process Sooner Than Later
Navigating successorship rules at the federal and state level can be complex, but companies should not let this stand in the way of claiming refunds. The sooner that your tax advisor identifies refund opportunities, the more time you have to prepare your claim—and time is ticking for previous tax years.
The federal statute of limitations for payroll taxes only covers refunds within 3 years from the April 15th following the year of acquisition (for FICA). State payroll taxes often maintain the same statute of limitations, though some states stipulate specific timelines or require employers to notify the state after changes to a federal return to receive a refund from the state.
Companies that underwent significant M&A transactions in 2022 should start the refund process immediately since their opportunity for refund expires on April 15, 2026. Because these refunds require assessing specific prior year payroll data, it is paramount that your tax advisor has enough time to prepare and submit appropriate refund claims.
Final Thoughts: Determine Eligibility with Confidence
Although planning for payroll tax considerations ahead of M&A transactions is the best method for guarding against double taxation, this is not always possible or feasible. In some cases, refund options can be a lucrative opportunity, though coordination between internal and external professionals in a timely manner is still required.
If your company has had M&A activity or an internal reorganization dating back to 2022, it may be worth considering refund opportunities while there is still time. Aprio offers cost-free feasibility studies for companies that had transactions involving more than 100 employees to determine whether you’re eligible for a refund.
