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Employers Can Reduce, Avoid Overpaying Employment Taxes

May 20, 2022, 7:24 PM

Employers can reduce their employment tax burden by better understanding state and federal employment tax laws, two employment tax specialists said May 10 at the American Payroll Association’s 40th Payroll Congress.

Reducing an employer’s employment tax burden varies depending on the situation, said Thomas Towson, the employment tax services director for Equifax Workforce Solutions.

State Unemployment Tax Rate Revisions

Employers use statutory elections, such as voluntary contributions, to reduce their state unemployment tax rates, said Rori Carney, a director for Equifax Workforce Solutions. However, the state usually does not issue the revised tax rate until much later, she added.

“It could take the state a quarter, maybe two, to issue a revised rate tax notice,” Carney said. “Always pay the tax rate you are assigned until you get the revised rate.”

Mergers and acquisitions can also revise an employer’s SUI rate through a transfer of experience, added Towson. The transfer of experience can increase or decrease an employer’s unemployment tax rate, and the effective date of the rate revision varies by state. Some states take years to issue the revised rate.

If merged entities end up overpaying employment taxes because of a revised unemployment tax rate, they can request a refund from the state or use the overpayment for future tax contributions, he said.

Carry Over Wages

Employers that are transferring employees from one entity to another might be able to carry over wages paid earlier in the year for employment tax wage base purposes, said Towson. A predecessor-successor relationship must be established, and federal and state rules for determining that relationship differ slightly.

“For federal purposes, it’s a three-prong rule,” he said. “Property of the trade or business must be acquired, and the two other rules are kind of silly because the employee has to be employed by the predecessor prior to the transaction and, secondly, the employee has to be employed by the successor immediately after the transaction.”

Most states also require the transfer of a trade or business, and employers must file the necessary compliance documents to inform the state of the transfer, Towson added.

Some states allow employers involved in a merger or acquisition to carry over wages for wage base purposes without accepting a transfer of experience. This is beneficial for employers that are merging with companies with high employment tax rates but want to be credited for wages employees received earlier in the year, he said.

However, most states only allow employers to carry over employee wages if they also transfer their experience for employment tax purposes, he said.

Localization of Work

In most cases, employers should be reporting each employee’s wages in only one state for unemployment tax purposes, but some employers pay unemployment taxes in multiple states for the same employee, said Towson. Employers should be making state unemployment tax payments to only one state for each employee, including remote and hybrid workers that might work in multiple states.

The U.S. Labor Department required all states to incorporate uniform localization of work provisions in their unemployment insurance laws to help employers determine where state unemployment insurance wages should be reported, he said.

All states have adopted the localization of work provisions, which contain a four-factor test, Towson said. The factors, from highest to lowest priority, are:

  • localization of services, or where most services are performed;
  • the employee’s base of operations;
  • the place where the employee receives direction and control; and
  • the employee’s residence.

Occasionally, employers still might not be able to determine where to report state unemployment insurance wages after using the four-factor test, he added. In that case, employers can elect the state of their choosing.

State Unemployment Insurance Wage Credits

Most states allow employers to receive unemployment insurance wage credits for taxable wages paid in another state when employees transfer or relocate, Carney said. The only states that do not permit wage credits are Louisiana, Minnesota, and Montana. Massachusetts grants wage credits, but employers must meet specific state rules.

Employers must permanently report employee wages to the new state for unemployment tax purposes in order claim the wage credits, she added. The employees must remain with the same legal entity after the transfer or relocation.

Common situations that might create wage credits include employee relocations, moving headquarters, telecommuting, and establishing a new factory or office in another state, she said.

Employers usually have three to five years after paying the new state’s unemployment tax to claim any refunds resulting from the wage credits, she said.

“An employer can go back three to five years and look to see if there’s any overpayments,” she said. “For most of the credits, most states will allow you to look for refunds within three to five years, especially for state unemployment.”

To contact the reporter on this story: Emmanuel Elone in Washington at eelone@bloombergindustry.com

To contact the editor on this story: William Dunn at wdunn@bloombergindustry.com