Employment Tax Opportunities in M&A

August 2022

BY

Thomas LeClair Global Employer Services Managing Director, Employment Tax Leader

Are you an employer that was involved in M&A activity during the past three years whereby employees were acquired/transferred from one legal entity to another? Or are you an employer that anticipates upcoming M&A activity that will involve the movement of employees? If so, you should be aware of potential employment tax savings opportunities that are often overlooked.
 
When an employer merges with or acquires another employer, the acquiring employer may be able to take credit for the wages that were already paid by the predecessor employer for social security (SS), federal unemployment tax (under the Federal Unemployment Tax Act (FUTA)) and state unemployment tax (under the State Unemployment Tax Act (SUTA)) within the same calendar year. Under certain circumstances, the acquiring company may also be able to save costs by utilizing the previous employer’s SUTA experience rating factors. Many companies, unaware of these benefits or unable to take advantage of them, end up overpaying taxes.
 

Overpayments Due to “Wage-limit” Restart

In certain transactions (including partial and total acquisitions and internal restructurings), the acquiring company may be deemed the “successor employer” to its predecessor with respect to employees acquired in the transaction. A successor employer generally does not need to “restart” the acquired employees’ wages at zero for purposes of the employees reaching the annual SS and FUTA wage limits. In many cases, the same rules apply for SUTA wage-limit purposes as well. If the successor employer restarted the wages, the employer may have unknowingly overpaid its employer payroll taxes.

Employees may also be impacted by having excess SS taxes withheld from their wages. While employees generally can recover any excess SS tax withheld as a credit or refund when filing their personal income tax returns, recovery of the employer’s overpaid taxes is not automatic. The employer must seek to recover its overpayments (including for FUTA and SUTA) through a targeted refund claim process with the IRS and state tax authorities. In addition, due to the statute of limitations, employers generally have only three years to make a claim for refund of overpaid employment taxes before the taxes become unrecoverable.


Prospective Savings Through Predecessor’s SUTA Tax Rate

Under certain circumstances, the acquiring employer may also be able to reduce its future tax expense by utilizing the predecessor employer’s SUTA experience rating factors (i.e., the predecessor’s SUTA tax rate). Based on the way most states compute employer SUTA tax rates on an annual basis, accepting a predecessor’s favorable SUTA tax rate may yield tax savings for the successor employer for multiple years.
 

How BDO Can Help

If your company went through an acquisition or internal restructuring during the past three years that involved a transfer of employees, you may be eligible for employment tax refunds. It’s important to act quickly if you believe you are eligible to recover overpaid taxes, since employment tax refunds must generally be claimed within three years of the transaction. Through a targeted Employment Tax Refund Review, BDO can help your company identify tax refunds and future savings opportunities to increase cash flow and lower your total tax liability. Contact BDO to learn more about how your company may be eligible to recover employment tax refunds or reduce employment tax costs.