An explanation of the basic components of a common paymaster arrangement.
IRC Section and Treas. Regulation
IRC Section 3121(s) – Concurrent employment by two or more employers (FICA)
IRC Section 3306(p) – Concurrent employment by two or more employers (FUTA)
IRC Section 3306(c)(8)
Treas. Regs. 31.3121(s)-1 and 31.3306(p)-1
Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)
When two or more members of a group of related corporations employ the same employees concurrently, it is possible that the entire group of related corporations will pay more FICA and FUTA taxes than a single corporation employing the same employees would pay because each of the corporations will apply a separate FICA and FUTA wage base to the employees’ remuneration. This means that the group of related corporations, as a whole, may pay Social Security taxes and FUTA taxes on an employee’s wages at one related corporation’s level and then again at another related corporation’s level for an amount that cumulatively exceeds the Social Security and FUTA wage caps.
To address this, Congress enacted Section 3121(s) and Section 3306(p). These provisions enable a related corporation (the “common paymaster”) to be treated as a single employer for purposes of the FICA and FUTA wage bases if the common paymaster (1) employs the same employees concurrently with one or more related corporations, and (2) disburses compensation on behalf of itself and the other related corporation(s) that concurrently employ the employees. Thus, when a common paymaster disburses all an employee’s wages from all related corporations in the group that concurrently employ the employees at issue, the common paymaster is treated as the only employer for purposes of FICA and FUTA, and a single FICA and FUTA wage base applies.
IRC sections Section 3121(s) and Section 3306(p) and their associated regulations address the common paymaster rules.
The basic aspects of a common paymaster relationship are that:
- The related corporations sharing one employee’s services are treated as one employer for purposes of the FICA and FUTA wage bases for wages distributed by the common paymaster.
- The common paymaster is responsible for withholding, depositing, and paying FICA and FUTA taxes, and filing and furnishing information returns associated with wages it disburses.
- If the common paymaster fails to remit these taxes, it remains liable for the full amount of the unpaid portion of these taxes. In addition, each of the other related corporations using the common paymaster is jointly and severally liable for its appropriate share of these taxes.
- If the related corporations continue to disburse funds separately, each corporation remains liable for withholding, depositing, and paying FICA and FUTA taxes, and filing and furnishing information returns for wages it actually disbursed to concurrently employed employees, but it is not liable for wages actually disbursed by another related corporation. The common paymaster provisions only apply to the disbursement of money, check or similar instrument.
Under Treas. Reg. Section 31.3121(s)-1, a common paymaster relationship exists when:
- Two or more corporations are “related” under one of the four tests in the regulations (see below).
- The employees receive their remuneration through one member of the related group – the common paymaster and
- The corporations’ employees are concurrently employed by two or more members of the related group, including the common paymaster corporation.
Corporations must meet one of the following four tests in order to be considered related corporations for purpose of the common paymaster rule.
- The corporations are members of a “controlled group of corporations” as defined in IRC Section 1563 or Treas. Reg. 31.3121(s)-1(b)(1)(i). (based on stock ownership)
- In the case of a corporation that does not issue stock, either 50% or more of the members of one corporation’s board of directors (or other governing body) are members of the other corporations’ board of directors (or other governing body) OR the holders of 50% or more of the voting power to select such members are concurrently the holders of more than 50% of that power with respect to the other corporation.
- At least 50% of the officers of one corporation are concurrently officers of the other corporation.
- At least 30% of the employees of one corporation are concurrently employed by the other corporation(s).
Treas. Reg. Section 31.3121(s)-1(b)(2) defines “common paymaster” as a member of a group of related corporations that disburses remuneration to employees of two or more corporations on their behalf and is responsible for keeping books and records for the payroll with respect to those employees. The common paymaster must be one of the employing corporations. Although the common paymaster is not required to disburse remuneration to all the concurrently employed employees of the related group, the common paymaster must distribute all remuneration to the employee for it to be considered the concurrently employed employee’s only employer for the purposes of the FICA and FUTA wage bases. The common paymaster must pay concurrently employed individuals by one combined paycheck, drawn on a single bank account, or by separate paychecks, drawn by the common paymaster on the accounts of one or more employing corporations.
The final component is “concurrent employment” which is defined in Treas. Reg. Section 31.3121(s)-1(b)(3) as the contemporaneous existence of an employment relationship between an individual and two or more corporations. An employment relationship is the performance of services by the employee for the benefit of the employing corporation (not merely for the benefit of the group of corporations), in exchange for remuneration which, if deductible for the purposes of Federal income tax, would be deductible by the employing corporation. The contemporaneous existence of an employment relationship with each corporation is the decisive factor. An individual who does not perform substantial services in exchange for remuneration from a corporation is presumed not employed by that corporation. The common paymaster rules apply only to remuneration disbursed to an individual who is concurrently employed by the common paymaster and at least one other related corporation at the time the individual performs the services for which the remuneration is paid.
IRC Section 3306(c)(8) specifically excludes from FUTA tax any wages paid for services performed in the employ of a religious, charitable, educational or other organization described in Section 501(c)(3). The exclusion does not include organizations exempt under other exemption classifications. This can create complications in the event of a common paymaster situation which involves a 501(c)(3) and 501(c)(4) (or other 501(c) code section).
In an instance, wherein a 501(c)(3) organization is the common-law employer of, and payer of wages to, its own employees as well as the sole payer of wages to a related organization exempt under 501(c)(4) (or other 501(c)code section), only the services of the (c)(4) employees are subject to FUTA; however, the (c)(3), as the common paymaster, is responsible for the reporting of the FUTA. The wages paid to the (c)(3) employees continue to be exempt from FUTA but the (c)(3) is required to file Form 940 and pay the FUTA tax for the (c)(4) employees.
The 940 filing requirement and FUTA tax liability transfers to the (c)(4) organization if the (c)(3) organization fails to report the FUTA wages disbursed to the (c)(4) employees.
If the (c)(3) files and pays FUTA on the (c)(4) employees’ wages and paid the SUTA tax, then the (c)(3) takes the SUTA credit on Form 940. However, if the (c)(4) files Form 940 and pays the FUTA tax on their employees, the (c)(4) cannot take the SUTA credit and is subject to the full FUTA tax rate. This is because the credit is attributable to SUTA payments made by the (c)(3) organization. Because the (c)(3) and the (c)(4) are separate entities, they are considered separate employers for FUTA rules and the SUTA credit is not transferable. Likewise, if the (c)(3) files and pays FUTA on the (c)(4) employees’ wages and the SUTA tax was paid by the (c)(4) organization, the (c)(3) cannot take the SUTA credit and is subject to the full FUTA tax.
Issue Indicators or Audit Tips
- Evidence of “shared” employees between related corporations.
- Payroll funds being transferred from the organization to a related corporation.
- Salaries and wages reported and no employment tax returns filed (or employment tax returns are filed but do not reconcile to the salaries and wages account).
- A 501(c)(3) organization is filing Forms 940. (This is common if the (c)(3) is the common paymaster for an organization classified under another 501(c) subsection.)
- An organization classified under a subsection other than 501(c)(3) does not file returns or claim expenses for FUTA.
To determine that the common paymaster provisions are met, the examiner should reference the provisions of Treas. Reg. Sections 31.3121(s)-1 and 31.3306(p)-1 and confirm that:
- The corporations are considered related under one of the four tests provided in the regulations.
- The common paymaster is a member of the related group.
- The employees received their remuneration through the common paymaster.
- Employees are concurrently employed by two or more related corporations.
It is possible for private benefit and/or inurement issues to be disguised as a common paymaster arrangement. If any of the following circumstances are discovered during an examination, the agent should request additional guidance from management, the K-Nets or counsel. (This is not a complete list and is provided for informational purposes only.)
- Transfer of an inordinate amount of wages to another entity.
- Funds are being transferred and there is no indication that they represent wages or that they are being transferred to a common paymaster.
Do not request books and records from or correspond with any organization other than the one under exam as this will create an unauthorized disclosure. The fact that each organization is a separate entity does not change just because two or more entities are involved in a common paymaster arrangement.