Common Payroll Tax Issues

By Tony Dai, CPA, Senior Tax Manager
ASL Technology Group

The Social Security Administration announced that the maximum wages in 2018 subject to the 6.2% Social Security tax, or “FICA”, will rise from $127,200 to $128,700, an increase of just over 1%. The FUTA (Federal Unemployment Tax Act) taxable wages ($7,000) is expected to remain unchanged. It is important to calculate both FICA and FUTA taxes correctly when an employee has multiple employers during the year.

If an employee works for a single employer during the year, the employer and employee each will pay a maximum FICA and FUTA tax of $7,979 and $420, respectively, for 2018. However, if an employee works for more than one employer during the year, each employer must withhold and pay FICA tax on wages up to the social security wage base for the year. So, for an employee who has a wage above the threshold and has worked for more than one employer during the year, both the employer and employee potentially could pay FICA and FUTA taxes over the maximum amount required.

Fortunately, an employee can claim a credit on their tax return for the excess amount of taxes withheld on wages above the maximum wage bases. Unfortunately, no such credit is available for an employer. An employer must calculate its FICA and FUTA taxes based on the amount of wages paid to its employees, irrespective of the fact that combined full-year wages exceeds the legal wage bases. This condition is also true even when both employers are related parties. However, under federal law, an employer and its related parties can get relief under the common paymaster rule, provided the employer meets certain criteria.

Generally, when two or more related corporations concurrently employ the same individual and compensate that individual through a common paymaster which is one of the related corporations that employs the individual, each corporation is considered to have paid only the wages it actually disburses to the employee. The related corporations could be defined by one of four tests, which include, controlled group of corporations (80% ownership), common board of director members (50% test), common officers (50% test), or common employees (30% test).

In a situation when a company is separated into two separate companies and some employees transfer from the pre-existing company to the newly-formed successor company, the successor company could continue to use the wage base that was used by the predecessor. The law provides three key requirements in order for wages paid by a predecessor to an employee to be treated as paid by the successor when applying the social security wage base:

  1. the successor acquired substantially all of the property of the predecessor,
  2. the employee was employed in the same trade or business as the predecessor, and
  3. the wages were paid during the calendar year in which the acquisition occurred and prior to the acquisition.

States may have different rules than federal law, for state-specific employment-related taxes.