The Common Paymaster Rule
The Need for a Common Paymaster
When a parent company owns a number of subsidiaries, it is entirely possible that the company as a whole will pay more payroll taxes than is strictly necessary. This situation arises when the employees of one subsidiary transfer their employment to another subsidiary. Every time this happens, the official wage base for an employee starts from zero at the new employing entity. Since there is a wage cap on the social security tax, this means that the company as a whole may be matching social security taxes on an employee's wages at one subsidiary, and then doing so again at another subsidiary for an amount that cumulatively exceeds the wage cap. This is not an issue if the total annual compensation of an employee is less than the annual social security wage cap. However, if an employee is highly compensated, then an excessive amount of social security taxes will be paid.
The same problem also arises for federal unemployment (FUTA) taxes. Since the wage cap on FUTA is so low, essentially every employee that transfers to a different company subsidiary will incur a duplicate tax, even if they are not highly compensated.
Employees can apply to the government to have their duplicate tax remittances returned. However, this is not the case for employers; once they remit their matching share of payroll taxes, those taxes are gone for good.
The Common Paymaster Rule
A solution to this situation is called the common paymaster rule. The rule states that the parent entity is allowed to calculate payroll taxes for these wandering employees as though they had a single employer for the entire calendar year. To do so, the parent designates one of the entities it controls as the paymaster for all employees. The designated entity is also assigned the task of maintaining all payroll records. The rule allows the designated entity to issue either a single consolidated paycheck to each employee, or to issue several paychecks, with each check drawn on an account controlled by the subsidiaries at which the employees actually work.
Two other points related to the common paymaster concept are:
- The designated common paymaster is responsible for remitting all payroll taxes.
- Those subsidiaries included in the arrangement remain jointly and severally liable for their respective shares of any payroll taxes that are supposed to be remitted by the common paymaster.
The common paymaster rule only applies under the following circumstances:
- The parties remitting taxes must be related. This means that either one entity owns at least half of the stock of the other entities, or at least thirty percent of the employees of one entity are concurrently employed by the other entity, or at least half of the officers of one entity are also officers of the other entity.
- If the entity does not issue shares, then at least half of the board of directors of one entity must be on the board of the other entity.
- The payments made to employees must be made by just one legal entity. This means that the payroll function should be consolidated across the combined entities for payment purposes.
This concept can also be applied to the employees of an acquiree. The wages paid by the acquiree entity are added to the wage base that is thereafter maintained by the common paymaster entity. However, the rule only applies in this manner if the acquirer has acquired all of the assets of the acquiree.