December Tax Intelligence: Internal Reorganizations
The new year can bring about change in organizations necessary to achieve certain strategic initiatives. These changes often involve the movement of employees between and among related employers (i.e., legal entities having unique FEINs) under the same organizational umbrella. Organizational changes can take many forms and be referred to in many different ways, including: internal reorganizations, spin-offs, mergers/ consolidations, workforce realignments, employee movements, restructurings, etc. For human resource and payroll professionals, the employment tax implications can be complex and numerous.
This issue of Tax Intelligence addresses some of the state unemployment tax issues that require consideration when undertaking an “internal reorganization.” Any time an employer transfers workforce associated with a division, business unit, or group of employees (i.e., a trade or business, or portion thereof), a transfer of unemployment experience (i.e., the factors used in the calculation of SUI tax rates) is required. This is not to be confused with employee-specific promotions, job transfers, and reassignments, which do not have the same requirements.
The date on which a workforce is transferred, the “effective date,” can have financial implications to the employers involved. For example, a March 31st effective date may have different impacts on SUI tax rates than an April 1st effective date. Any time an employer’s trade or business, or portion thereof, is transferred to another employer, it is prudent to perform a cost/benefit analysis to assess the impact on SUI tax rates. This is especially true if the effective date impacts the first quarter, which typically contains a sizable portion of an employer’s taxable payroll for the year.
During pre-transfer planning, it is important to confirm that the post-transfer structure avoids creation of questionable employment tax practices [e.g., “payrolling” (for more information on payrolling see the October and November 2014 issues of Tax Intelligence)] and identify if the workforce transfers occur in states that may require the consolidation of all related SUI tax accounts, including those accounts not involved in the transfer.
With mandatory transfers of an employer’s unemployment experience comes compliance filing obligations. Every taxing jurisdiction requires employers, both the predecessor and successor, to notify the appropriate workforce agencies when undertaking an internal workforce realignment. This allows workforce agencies to gather information sufficient to calculate and reassign SUI tax rates based on the facts and circumstances and better administer unemployment claims processing.
Taxable Wage Base Carryovers
Under most circumstances involving workforce transfers with mid-year effective dates, assuming all compliance filing obligations have been satisfied, employers are allowed to continue the annual SUI taxable wage base (i.e., wages paid by a predecessor employer may be used by the successor employer in determining the annual taxable wage base). Although the federal “successor” provisions differ from those for SUI, the same carryover treatment often applies for purposes of social security and federal unemployment (“FUTA”) taxes.
Employers that have restarted SUI, social security, and/or FUTA annual taxable wage bases as a result of historical internal workforce realignments may be able to recover significant overpaid employment taxes by filing amended returns and/or reports.
Equifax assists employers in assessing risks and identifying opportunities associated with internal reorganizations, including recoveries associated with duplicated employment taxes. For more information, please contact Pete Krieshok at (314) 214-7325 or via e-mail at firstname.lastname@example.org. You can also visit our corporate blog for information on other employment tax matters that might impact your organization. A webcast replay devoted to internal reorganizations is posted in the Equifax Workforce Solutions Webinar Library.
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