Wage base carryover

Definition

Whether the seller's year-to-date wages count toward the buyer's FICA cap.

Why It Matters

The Social Security wage base is counted per employer per year, so a mid-year sale can make the buyer pay employer FICA a second time on wages the seller already paid it on. The regulation carries it across on three conditions and all three are required. The buyer acquired substantially all the property used in the trade or business, or in a separate unit of it. The employee worked for the seller immediately before the sale and works for the buyer immediately after. And the wages were paid earlier in the same calendar year. How the deal was structured does not matter, which is the part that surprises people, because the rule says outright that the method of acquisition is immaterial. It bites hardest where somebody is paid above the cap, which in a small business usually means the owner and one or two managers. Get the seller's year-to-date payroll register at closing, and do not let a week pass between the last payroll and the first.

In numbers: A manager already paid $150,000 by the seller by August costs the buyer employer Social Security tax on that pay all over again if the three conditions are not met.