Employment tax consequences of a corporate change of control event.

• Author: Smith, Annette B.

The employment tax consequences related to a corporate change of control event generally depend on the type of event, namely whether there is an asset purchase, a merger, or a stock acquisition.

FICA Tax

Secs. 3101 and 3111 impose FICA taxes on wages, as defined in Sec. 3121 (a), with respect to employment, as defined in Sec. 3121 (b). FICA taxes consist of the old age, survivors, and disability insurance tax (Social Security tax) and the hospital insurance tax (Medicare tax); these taxes are imposed on the employer and the employee. The term "wages" is defined in Sec. 3121 (a) for FICA tax purposes as all remuneration for employment, subject to certain specific statutory exceptions.

Social Security taxes are imposed on wages up to a certain amount, referred to as the Social Security wage base or simply the wage base. Once an employee earns wages in excess of the Social Security wage base ($106,800 in 2011), wages are no longer subject to the Social Security tax. The Medicare tax is imposed on all wages paid by an employer to an employee.

Technically, Sec. 3101(a) imposes the employee's portion of the Social Security tax on the employee. However, Sec. 3102 provides that an employer must withhold the amount from wages paid by the employer to an employee and must pay the withheld amounts over to the government.

If an employee works for more than one employer during the calendar year, the combined amount of wages subject to the employee portion of the Social Security tax is capped at the Social Security wage base. However, the Code does not contain an exception allowing an employer to reduce or eliminate withholding the Social Security tax from the employee's wages when the employee receives wages from a second employer or multiple employers during the calendar year, even when the employee has reached the Social Security wage base taking into account wages paid by another employer or a combination of employers. Instead, Sec. 6413(c) provides for a "special refund" that allows the employee to claim a refund on the employee's individual income tax return of the amount of excess Social Security taxes withheld from the employee's pay because the employee had more than one employer during the calendar year.

There is no special refund mechanism for an employer that paid wages to the employee after the employee reached the Social Security wage base (see Rev. Rul. 57-32). For example, if an employee receives wages in excess of the wage base from one...