Payrolling is the practice of two or more separate legal entities reporting under one “Payrolling” account.  Texas law requires that each separate legal entity report under their own TWC account.  When a “Payrolling “ situation is discovered, the Tax department breaks up the Payrolling account and establishes new separate accounts for the actual employers.

In 1977 the Federal Social Security and Unemployment Tax Acts were amended to provide that beginning January 1, 1979 a related group of corporations, employing an individual concurrently, would not be required to pay dual FICA and FUTA taxes if the individual in question is compensated through a Common Paymaster, which is one of the corporations. Under federal law prior to January 1, 1979 and under present state law and practice, in such a situation, both corporations would be liable for taxes on the individual's wages up to the statutory limit. Although some of the states have indicated that they will follow the federal law, the majority, some thirty-three, (including Texas) have indicated that they will not.

The issue of Payrolling is not precisely addressed in the TUCA. Payrolling occurs when one employer reports another employer's employees. The term payrolling encompasses combined reporting of wages. The Commission does not allow this practice, but instead requires each separate legal entity to report its employees under its own account number due to the requirement to keep each legal entities' experience segregated under our experience rating system.

When confronted with a possible common paymaster or Payrolling situation, it is essential to determine what legal entity has the right to direct and control the employees. The entity with the right to direction and control is the employer and as such, must report the employees' wages. Merely processing an employee paycheck does not mean that an entity has the right to direction and control.

Additionally, it is important to determine which entity bears the salary expense. Although a common paymaster or Payrolling entity may issue all employee paychecks and report taxes for all employees, they do not bear the salary expense. The entity reporting the wages will charge the related entity for salary expenses. Hence, the related entity ultimately bears the salary expense and is the employer.

The Status Section receives inquiries regarding the common paymaster or Payrolling practice in different ways. Telephone calls and written correspondence are the most common. Inquiries regarding the Commission position on this issue are often ambiguous. It is important that the accounts examiner ask enough questions to clarify the situation.

If an inquiry is via a telephone call, the accounts examiner should state the Commission's position on common paymaster and/or Payrolling issues.

If the caller requests written documentation of the Commission's position, access the SLR screen and send FL-22. See Chapter 5 - "Description of SLR letters".

If the inquiry is written, the accounts examiner should first attempt to contact the inquiring party by telephone. If unsuccessful at making a telephone contact the accounts examiner should access the SLR screen and send FL-22. See Chapter 5 - "Description of SLR letters".

When a common paymaster or Payrolling practice is discovered, the situation must be corrected.

Corrections involve adjustments to the common paymaster account and completion of Quarterly Reports by each separate legal entity involved. Corrections should be made to all concerned quarters within the year that the Payrolling situation was discovered. Sometimes it is appropriate to key liability information and changes into the system before adjustment paperwork has been completed and returned by an employer. Other times it is appropriate to wait until all adjustment paperwork has been completed and returned. If the accounts examiner is unsure of what is appropriate for a given situation he/she should contact their unit supervisor.

The transfer of the wages from the Payrolling account to the correct employer accounts will constitute an acquisition. The transfer of the workforce between the accounts satisfies the requirements of Section 201.022.  The transfer of experience between the entities as required by section 204.083 will also apply.  In all cases regarding Payrolling, there exists common ownership or the correct employer had a security interest in the Payrolling Company.

To correct a common paymaster or Payrolling situation:

1. Search the EMF to determine whether or not account numbers exist for each separate legal entity involved.
   
   
2. Assign an account number to each separate legal entity that does not have an account number.
   
   
3. The correct accounts will be established under 201.022 with a liability date of 1-1 of the year in which the Payrolling situation was discovered.  If the Payrolling company has been in existence for less than a year, the Payrolling account will be established in error and the correct legal entities established accordingly.
   
   
4. Provide each new account with a Status Report and Quarterly Reports.
   
   
5. Provide the common paymaster or Payrolling account with Forms C-5 and C-7 to correct previous erroneous reporting.
   
   
6. Process changes to the common paymaster or Payrolling account as appropriate. This may involve changing the liability date, inactivating the account, closing back to statute or closing the account as "Established in Error".
   
   
7. Secure C-1AM’s to properly reopen related entities that were suspended in error. Have the common paymaster account prepare adjustments to show proper reporting of wages.
   
   
8. Document FTC with Payrolling information – all accounts involved.

NOTE: If you encounter any C-3’s or C-5’s involving payrolling situations forward those directly to TEU Supervisor.

Example 1:

Account A, the Payrolling account, has been operating in Texas for more than 5 years.  The Payrolling account is discovered in the 3rd quarter 2011.  Investigation reveals that 3 separate legal entities should have been reporting the wages;

Resolution:

Payrolling account A will be inactive effective 12-31-10 (unless they had employees of their own). Account for the 3 subject employers (B, C, and D) will be established effective 01-01-11 (the beginning of the year in which the Payrolling situation was discovered).  B, C, and D will be partial successors to the Payrolling account A effective 01-01-11.  Rate transfer under 204.0851 will apply. Quarterly reports for 2011 will be secured from B, C, and D and the Payrolling account will be adjusted accordingly.

Example 2:

Examiner becomes aware in 2011 that 3 existing liable accounts B, C, and D  have consolidated into Payrolling company, A.  These could be recorded as acquisitions or Payrolling company may be established as a new employer. Payrolling account has operated for 3 quarters as a Payrolling Company.

Resolution:

As Payrolling company A has operated for less than a year, Payrolling company A will be established in error (unless they have some employees of their own).  Correct employers B, C, and D will be re-opened (if accounts were closed) and quarterly reports secured.  Quarterly reports under Payrolling account A will be deleted or adjusted accordingly.

Example 3:

Examiner becomes aware in 2011 that 3 existing liable accounts B, C, and D  have consolidated into  Payrolling company, A.  These could be recorded as acquisitions or Payrolling company may be established as a new employer. Payrolling account has operated since 1-1-10 as a Payrolling Company.

Resolution:

As Payrolling company A has operated for more than the current year, Payrolling company A will be inactivated on 12-31-10.  Examiner will process original correct employers as predecessors with rate transfer into the Payrolling account.   Correct employers B, C, and D will be re-opened (if accounts were closed) effective 1-1-11 and quarterly reports secured. The Payrolling company will be shown as a predecessor with rate transfer effective 1-1-11. Quarterly reports under Payrolling account A for 2011 will be deleted or adjusted accordingly.

NOTE:  In this example the Payrolling account operated for more than the year in which the Payrolling situation was discovered. It is important to note that the original transfer of the workforce into the Payrolling account, within the 3 years statute of limitations, will constitute an acquisition under 201.022. Once the Payrolling account is closed or amended to the beginning of the year in which the Payrolling situation was discovered, the correct entities will now be the successors to the Payrolling account.  So it is possible to have company B go to A and then A go to B.