Payroll in Practice: 9.18.2023

Question: A controlled group of corporations wants to assign an exempt executive employee to work concurrently for two separate corporations within the group. Given the minimum salary requirement for exempt employees, can an exempt employee be paid using the common paymaster method without endangering the exemption?

Answer: There are two separate issues in this question, whether the two employers may use a common paymaster and whether an exempt employee’s minimum salary requirement can be met when dependent upon payments from multiple employers.

The employers may pay an exempt employee using the common paymaster rules provided the applicable requirements are met.

The employer may satisfy the minimum salary requirement for exempt status by combining the payments from multiple employers if the employer and employee relationships satisfy the joint employment rules of the Fair Labor Standards Act.

It is not necessary that both common paymaster and joint employment be used; however, using a common paymaster might help support a determination that a joint employment relationship exists.

The general rule is that each employer, as distinguished by separate employer identification numbers, is responsible for tax withholding and employer taxes on employee wages up to the full amount of the wage base.

Under federal tax law, a common paymaster enables related corporations to be treated as a single employer for purposes of the FICA and FUTA wage bases if the requisite elements are met. The common paymaster is treated as the only employer for purposes of FICA and FUTA, and a single wage base applies to the employee working for both joint employers.

For example, an employee works for two employers during 2023. Employer A pays the employee $125,000 and Employer B pays the employee $75,000. Employer A withholds $7,750 in Social Security tax ($125,000 × 6.2%) and pays an additional $7,750 employer share. Employer B withholds $4,650 in Social Security tax ($75,000 × 6.2%) and pays an employer share of $4,650. Total withholding for the employee is $12,400, which exceeds the maximum tax of $9,932.40 ($160,200 × 6.2%) by $2,467.60. The employee claims this amount as a credit on their income tax return. The employers may not recover any of the employer share.

Similarly, the employers will each pay federal unemployment tax on wages up to the $7,000 wage base.

The common paymaster rules are covered in Internal Revenue Code Sections 3121(s) and 3306(p).

In brief, the common paymaster employs the same employee(s) with one or more related corporations. It is responsible for withholding, depositing, and paying FICA and FUTA taxes and filing information returns associated with the wages it disburses. Each of the other related corporations is jointly and severally liable for its appropriate share of the taxes, and each of the other related corporations is responsible for withholding depositing, paying employer taxes and reporting for wages it actually disbursed to concurrently employed employees. Related corporations are not responsible for wages actually disbursed by other related corporations.

To be related corporations under the common paymaster rules, one of four tests must be met.

• The corporations are members of a controlled group of corporations as defined in IRC Section 1563 or 26 CFR 31.3121(s)-1(b)(1)(i).
• 50% of the board members of one corporation are also board members of the other corporations.
• At least 50% of the officers of one corporation are concurrently officers of the other corporations.
• At least 30% of the employees of one corporation are concurrently employed by the other corporations.

Each workweek that an organization is a joint employer of an employee, that organization is jointly and severally liable with any other joint employers for compliance with all the applicable provisions of the FLSA for all of the hours the employee works in that workweek. In discharging this joint obligation the employer and joint employers may take credit toward minimum wage and overtime requirements for all payments made to the employee by the employer and any joint employers.

Under the joint employment rules of the FLSA there are two situations in which joint employment exists. Under the first, the employee works for an employer, but another person simultaneously benefits from that work and is acting directly or indirectly in the interest of the employer in relation to the employee.

Factors used in determining whether the other person is a joint employer include whether the other person hires or fires the employee, supervises or controls the employee’s work schedule or conditions of employment to a substantial degree, determines the employee’s rate and method of payment, or maintains the employee’s employment records.

The second situation relates to employers that are sufficiently associated with respect to employment of the employer. This association might involve an arrangement between the employers to share the employee’s services, in which one employer acts directly or indirectly in the interest of the other employer in relation to the employee. The employers could also share control of the employee directly or indirectly because one employer directly or indirectly controls, is controlled by, or is under common control with the other employer.

Employers who meet the joint employment rules may use a common paymaster without endangering an employee’s FLSA exemption, so long as the employee continues to meet the exemption’s wage and duty requirements.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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