Don't Overpay Employment Taxes!

Employment taxes represent the single largest area of tax payments made by U.S. companies today (typically 25% of corporate tax dollars).  Most companies consider employment tax as an administrative function with the main focus on correct and onetime payment of payroll.  “Ownership” of the payroll function typically falls across various groups: finance, accounting, payroll, HR, and/or a third party payroll vendor.  Typically, no one group takes bottom line responsibility of this area and all parties assume that one of the other groups is analyzing the payroll and associated taxes issues.

Due to this adopted passive standpoint, unrecognized employment tax overpayments of FUTA, FICA and SUI are relatively common and we typically find small to mid-size employers with thousands to even hundreds of thousands of dollars in overpayments.  Companies need to view employment tax strategically and manage the unemployment reserves as an “asset” and treat the optimization of employment tax as a “cash flow” issue. 

Below are actions that you can do today to help you recover refunds, reduce future tax rates and associated expenditures, and improve compliance.  As a rule, assume that the agencies and/or third party vendor are not bringing overpayments to your attention and that your ability to recover overpayments will quickly expire due to statutes of limitations.

Obtain Refunds from Retrospective Reviews
First, one needs to perform a retrospective review of employment tax account activity that might have triggered overpayments.  Typically, most jurisdictions have up to three year statutes of limitations to file for recovery.

Review merger or acquisition activity within the last three years
Your company, as an acquirer, may have rights to the predecessor’s employment tax contributions for the state and/or federal tax wage bases as well as unemployment tax rates (based upon related reserves and experience ratings).  It is very common for acquirers to treat the acquired employees as “new hires” from a wage-base perspective, and, as such, may potential be doubling up on the employment tax payments.  If your company had a transaction in Q2 or Q3, the potential overpayment may be material and it is definitely worthwhile to see if you qualify as a successor and have the associate wage-base carry-forward rights. 

For unemployment reserves/experience ratings, New York makes it mandatory that the acquirer takes over all or a portion of the predecessor’s unemployment experience.  New Jersey and Connecticut have slightly different ranges of rights that are influenced by the type of transaction (total or partial) and determination of transfer of experience.

To be in compliance, make sure that the state agency is promptly advised of any activity.  Likewise, to avoid missing filing deadlines for beneficial treatment (which can be as short as 30 days in CT), make sure to evaluate this area prior to transaction close so you can execute the needed filings as the acquired employees move to a new employment account.    

Did you change from a corp. to LLC/LLP?
Changing to an LLC/LLP requires establishing a new entity.  As such you also have rights to payroll wage-base carry forward as mentioned above (1).

Reconcile your active/inactive employment tax accounts
Many companies have overpayments embedded in their state unemployment account(s). Overpayments occur relatively frequently due to a variety of reasons (change of payroll vendor, using incorrect rate for contribution, double filing, etc.).  Most states (including New York) typically do not issue credit notices if overpayment has occurred.  As such, the state agency needs to be contacted to confirm if credits exist on your account, and if so, perform a reconciliation to see how the overpayments occurred and if they are eligible for recovery.

Lower Your Tax Rates and Improve Cash Flow by Planning Ahead
After completing your rearward facing review, put the following plans into action to lower your ongoing employment tax expenditures.

Pay on time and correctly
The state and federal agencies are very quick to act in case of under or delayed payment.  Incorrect action in this area quickly leads to penalties, interest charges, raised tax rates and a significant use of company resources to get back into compliance.

Consider a third party unemployment compensation administrator
If your company has a larger employee population (over 250 employees) and/or has high turnover, it would be very wise to consider engaging an outside unemployment vendor to manage your claims process.  Claim activity against an employer drives the unemployment tax rates and can cause substantial rate movement (NY rates range from 1.5% to 9.9%, NJ from 0.3% to 5.4%, CT from 1.9% to 6.8%).  It is very common that companies do not actively/correctly monitor this area and allow the claims (and associated rates) to balloon due to lack of knowledge of how to handle and/or resources to correctly track and contest damaging/incorrect claims.