global Tax Save Payroll Taxes Through a Common Paymaster May 26, 2022 Businesses…do you operate multiple companies in your corporate group? Do some of your employees work for more than one business entity within the group? You could be overpaying payroll taxes. Here’s how a common paymaster can help. Is your business comprised of multiple entities, each with its own payroll? When you have employees working for multiple related companies, both you and the employees may be paying too much in FICA and FUTA taxes. This is where a “common paymaster” can help. Read on. Employment taxes “refresher” Employment taxes are: The federal income tax withheld from employee pay. Federal unemployment taxes (FUTA tax) paid by employers based on number of employees and unemployment rates. Social Security and Medicare taxes (called "FICA taxes") withheld from employee pay. The Additional Medicare tax enforced on higher-earning employees. Self-employment taxes, (the Social Security and Medicare taxes) paid by self-employed business owners. By "payroll taxes" the IRS means solely Social Security and Medicare taxes withheld from employee pay and matched by employers. The problem at hand Every time an employee of one subsidiary transfers their employment to another subsidiary within the company during a calendar year, the official wage base for an employee starts from zero at the new employing entity. The company as a whole may be matching social security taxes on an employee’s wages at one subsidiary, and then doing so again at another subsidiary, potentially exceeding the wage cap on social security taxes. This issue surfaces when it comes to federal unemployment (FUTA) taxes as well. The wage cap on FUTA is low so practically every employee who transfers to another company subsidiary will be assessed a duplicate tax. What is a common paymaster? To avoid this issue, many companies designate a “common paymaster”. This is an entity within the group that is designated to handle payroll and taxes for employees of related companies on a combined basis. What are the benefits? You avoid overpaying payroll tax by paying shared employees from a single source. 2022 Tax Rates The social security tax portion of the FICA tax is 12.4% against a wage base of $147,000 for 2022. All wages are subject to the 2.9% Medicare portion of the FICA tax 7.65% (6.2 + 1.45%) of the FICA tax is withheld from employee wages, and the employer pays the other half for another 7.65% (6.2% + 1.45%). Picture this Let’s say you have a consulting business with a subsidiary and the two companies share a business manager. The manager earns $175,000 per year (two $87,500 paychecks). Without a common paymaster, each entity’s separate social security tax bill would be $6693.75 (7.65% of $87,500), for a total of $13,387.50. By designating the consulting business as the common paymaster, the manager’s wages are considered paid from one source. Only $147,000 of those wages would be subject to the social security tax part of FICA. The 1.45% Medicare tax would be assessed on the entire $175,000. The FICA tax obligation in this case would be $11,651.50 (6.2% * $147,000) + (1.45% * $150,000). This is a payroll tax savings of $1,736! What companies qualify for the common paymaster tax break? Your company must meet the following requirements to be eligible for this tax break: A minimum of 30% of the employees of one company must work for the other company.At least 50% of the officers of one company must be officers of the other entity.At least one of the companies must own 50% or more of the other companies. Questions? Contact us.
