According to the IRS, a predecessor-successor relationship is a type of a statutory merger. The primary difference between a statutory merger and a predecessor-successor relationship is in the assumption of wages. In a statutory merger, the discontinued employee taxable wages-to-date are not assumed by the new corporation. In the predecessor-successor relationship, employees' taxable wages for the entire year are treated as payments from only one employer, the successor. In this way, the successor incurs fewer unemployment tax liabilities than those in a statutory merger. A predecessor-successor relationship exists when the following conditions occur:
One employer (i.e., the successor) acquires substantially all the property of a trade or business of another employer (i.e., the predecessor); and
During the same calendar year, in connection with or immediately after the acquisition, the successor employs individuals who immediately before the acquisition were employed in the trade or business of the predecessor. Therefore, for purposes of figuring the annual wage limit for Social Security, the successor employer may include the wages the predecessor employer paid to its employees.
Predecessor-Successor Reporting Requirements
Form 941: The successor must file Form 941, which should cover the wages and taxes paid by both corporations during the period.
Form 940: The successor corporation must also file Form 940, which includes the wages and taxes paid by both corporations for the entire calendar year.
Form W-2: The employers involved must use either the standard or alternative Predecessor-Successor W-2 Procedures for reporting wages, taxes, and other items on Form W-2.
Standard W-2 Reporting Procedure
Under the standard procedure, the predecessor must report on Form W-2 the wages it paid to its employees, and the employment taxes withheld on such amounts. This form must be furnished to employees by January 31 of the year following the year to which the form relates. Thus, under the standard procedure, the successor is responsible for reporting only its own payments of wages and other compensation, and any employment taxes withheld on such amounts.
Alternative W-2 Reporting Procedure
Under the alternative procedure, the predecessor and successor can agree that the successor will furnish W-2 forms to all employees it retains. Such an agreement will relieve the predecessor of its obligation to furnish W-2 forms to employees retained by the successor employer. Thus, employees will have to be furnished only one Form W-2, which can include the wages paid, and taxes withheld, by both the predecessor and the successor. If such an agreement is made, the successor must assume the predecessor's entire obligation. Note, however, that the predecessor still must furnish Form W-2s to those employees who were not retained by the successor.
If the alternative procedure is used, there will be a discrepancy in the amounts reported on a predecessor's Form W-3 and Form 941.
The following chart details the tax filing ramifications of a Predecessor-Successor relationship.
Click here to view the Predecessor-Successor relationship chart (PDF file)
Tax Service Support
The Tax Service will accommodate employers undergoing reorganizations such as those described above. However, special handling such as the processing of amendments and inquiries is often required in order to successfully transfer and/or consolidate the data for depositing and reporting purposes.