Payroll Reporting in Asset Acquisitions: Revenue Procedure 2004-53

In Tax by Coolidge Wall

With the flurry of activity that occurs during an asset purchase transaction, it is not uncommon to overlook the details involved with coordinating the payroll reporting for employees that are acquired or hired by the purchaser. As with most issues in an asset purchase transaction, it is preferable for the parties to address the issue directly in the asset purchase agreement. Planning ahead reduces the chances for missed filing deadlines and associated penalties and interest.

Internal Revenue Service Revenue Procedure 2004-53 provides the two methods by which a predecessor (seller) and successor (buyer) employer can report payroll in the year of an asset acquisition that involves the transfer of employees.

Under the “standard procedure,” the predecessor performs all reporting duties for the wages and compensation it pays. Correspondingly, the successor employer reports only the wages it pays. Each employee that becomes an employee of the successor employer necessarily receives two W-2s for the tax year, one from predecessor and one from successor, each covering different parts of the year. Additionally, each transferred employee must provide the successor with a new Form W-4. Note: under the “standard procedure,” if predecessor is required to file a final Form 941 as a result of the acquisition (because it has no remaining employees after the transaction), then predecessor must issue expedited W-2s to its former employees now employed by successor.

Under the “alternate procedure,” if the parties agree, predecessor is relieved of all reporting obligations for the transferred employees, and successor assumes the obligation of filing W-2s covering the entire year. Each employee that becomes an employee of the successor employer receives one W-2 covering the entire year. Predecessor must transfer all Forms W-4 and W-5 to successor for the transferred employees. Additionally, Rev. Proc. 2004-53 requires successor to submit to the Service copies of the Forms W-4 received from predecessor.

Again, agreeing in the asset purchase agreement to the payroll method to be used reduces confusion down the road at tax filing time.

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