ETS Tax Intelligence: Beginning of Year Workforce Restructurings
To avoid complications that can occur with mid-year transfers of employees under the same organizational umbrella, many organizations wait for the beginning of a calendar year to implement organizational changes necessary to achieve strategic initiatives. Organizational changes can take many forms and be referenced in many different ways, including: internal reorganizations, consolidations, spin-offs, mergers, workforce realignments, employee movements, integrations, and workforce restructurings. Implementing these changes causes complex employment tax implications and happens to coincide with the busiest time of year for payroll and payroll tax professionals.
There are state unemployment insurance (“SUI”) tax issues that require consideration when undertaking an “internal reorganization.” Any time an employer transfers workforce associated with an entire company or a division/business unit of a company, a transfer of unemployment experience (i.e., the factors used in the calculation of an employer’s SUI tax rates) is required. An employee transferred to a different legal entity as the result of an employee-specific promotion, job transfer, or reassignment, does not have the same compliance requirements.
With mandatory transfers of an employer’s unemployment experience comes compliance filing obligations. Every taxing jurisdiction requires employers on both sides of the restructuring i.e., the predecessor and successor, to notify the appropriate workforce agencies when undertaking internal workforce realignment. This allows workforce agencies to obtain the information sufficient to calculate and reassign SUI tax rates based on the facts and circumstances and ensure proper administration of unemployment benefits.
The Difference a Day Can Make
The effective date on which a workforce is transferred can have financial implications for the employers involved. For example, a December 31st effective date may have different impacts on SUI tax rates than employees moved on a January 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 when the effective date impacts the first quarter, which is typically when employers incur a significant portion of their SUI tax cost for the calendar year.
It is also important to confirm that the post-transfer structure avoids creation of questionable employment tax practices commonly referred to as payrolling, the practice of reporting wages under the SUI account of an organization that is not the “common law employer.” It is also prudent for employers to determine if the workforce transfer is to occur in a state that may require the consolidation of some or all commonly owned SUI tax accounts, including those accounts not involved in the transfer of workforce e.g., Indiana and Michigan.
Taxable Wage Base Carryovers
Under most circumstances involving December 31st or January 1st workforce transfers, employers avoid the complications associated with restarting the annual SUI taxable wage base. However, with mid-year effective dates, assuming all compliance filing obligations have been satisfied, employers are allowed, in most cases, to continue the annual 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 SUI and federal “successor” provisions differ, the same carryover treatment often applies for purposes of social security (“FICA”) and federal unemployment (“FUTA”) taxes.
For employers that have engaged in beginning of year workforce restructurings in 2018 (or end of year 2017), there is still time to assess risks, fulfill compliance obligations, and identify opportunities associated with the movement of workforce between related legal entities. 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.
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