Avoiding double taxation - an employment tax savings opportunity.

• Author: Broomhead, Nick D.

Controlling employment tax costs is a major concern in today's corporate environment. Mergers, acquisitions and other changes can cause employment tax costs to increase dramatically for the entities involved. When an entity change occurs during a calendar year, companies may severely overpay taxes under FICA, FUTA and state unemployment insurance tax acts (SUTA). Employment tax overpayments often occur when employers unnecessarily restart employee wage bases at zero subsequent to a merger, reorganization or acquisition, effectively resulting in double taxation. Most employers do not realize the extent to which employment taxes are within their control; by proactively seeking ways to control and reduce these costs, companies may reduce their tax burden and significantly increase their bottom line.

The term "wage base" generally refers to the annual level of wages subject to a specific type of taxation. For example, in 1998, the Social Security portion of FICA tax applies only to the first $68,400 of wages paid to each employee; FUTA taxation is limited to the first $7,000 of wages and SUTA wage limits are determined each year by each state. When "double taxation" of wages for Social Security purposes occurs, an individual may recoup the excess tax on his personal income tax return; however, employers typically do not have this option.

Provisions generally exist within the regulations that govern the application of employment taxes that allow employers to use the wages paid by a previous employer to meet the applicable wage bases for employees transferred as a result of a merger, reorganization or acquisition. In most instances, to use these prior wages, it is necessary for the surviving entity to be regarded as a "successor" employer. The definition of "successor" varies according to the type of tax, but is generally based on the amount of assets, property used in the trade or business that was acquired or some percentage of employees transferred as a result of the transaction. The acquired employer (which may or may not continue to exist after the transaction) is referred to as the "predecessor" employer. The transfer of the taxable wage base of each employee prevents double taxation, as the successor corporation is effectively credited for the taxable wages reported by the predecessor.

When determining if an employer qualifies as a successor, the manner in which the predecessor was acquired typically is immaterial. Qualifying transactions...