The Common Paymaster Rule

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The Need for a Common Paymaster

When a company has multiple subsidiaries, it is possible that it will pay more payroll taxes than is required by the law. This happens when employees transfer between subsidiaries during the calendar year; every time they switch, they begin compiling their social security wage base all over again with a different payroll department, so they never have a chance to reach the current maximum wage base. Since the company matches the social security payments to the government, this means that the company pays additional payroll taxes if an employee would otherwise have exceeded the maximum wage base. The same concept applies to federal unemployment taxes (FUTA). Though employees can recover their share of these excess withholdings, employers are not allowed to do so.

The same problem arises if employees work for multiple subsidiaries of the same group of companies at the same time.

The Common Paymaster Rule

A company organized as a corporation can take advantage of the common paymaster rule to avoid paying these extra taxes. Under this concept, a parent company can calculate payroll taxes for employees being paid by multiple subsidiaries as though they were being paid by a single organization for the entire year. This means that the parent company designates a single entity within the group of controlled companies to pay those employees who are employed by more than one subsidiary. This "common paymaster" is also responsible for maintaining the payroll records for those employees. The common paymaster can pay concurrently employed individuals with one paycheck, or with separate paychecks that are drawn on the accounts of one or more of the various employing subsidiaries.

The common paymaster also has primary responsibility for remitting payroll taxes to the government, which the common paymaster computes as though it were the sole employer of those individuals who are concurrently employed. Also, all other subsidiaries using the common paymaster are jointly and severally liable for their shares of payroll taxes to be remitted.

The following conditions must be met for the Common Paymaster rule to apply:

The paying parties must be “related,” where either (1) a single company owns at least ½ the stock of the other related companies, (2) at least 30% of the employees of one corporation must be concurrently employed by the other corporation, or (3) at least half of the officers of one corporation must be officers of the other corporation.
If a company is a non-stock corporation, at least ½ the board of directors of one corporation must also serve on the board of the other corporation.
All payments made to employees must be through a single legal entity; thus, the employee cannot be paid separately by multiple payroll departments within the same company.

The last condition is key – all payments must be made from a single entity, which calls for the consolidation of payroll departments in order to achieve the available savings under this best practice.

The common paymaster concept can be used when a company wishes to credit any wages paid to employees of a new acquiree to their wage base when being paid by the acquiring company. The common paymaster rule can be applied in this scenario if the acquirer has acquired substantially all of the assets of the acquiree, and if the employees of the acquiree are immediately employed by the acquirer.