Here is a quick overview of how a tax restart works in the context of a company (employer) and PEO relationship, and what an employer can do to avoid triggering a tax restart.
A tax restart occurs when an employer has to restart paying taxes mid-tax year despite their contributions to date for things like Social Security and Unemployment. This is a government required protocol that is triggered when a new tax id number is used under which the wages and taxes are being filed. Typical scenarios are changing employment or changing entities within an organization. A tax restart affects the following taxes but is not limited to:
- Social Security for the employee and employer
- CA SDI
- Federal Unemployment
- State Unemployment
- Some local taxes
The good news is that companies (e.g. the common law employer) and their employees can avoid tax restarts by supplying their PEO partner with the year-to-date data seen below:
- YTD taxable wage basis
- YTD tax amount withheld by their employees
- YTD employer for each tax withheld
The catch is that the files must be received within two days of their last payroll delivered via their old system and before the switch to the new PEO payroll service kicks in.
Companies with an employee base compromised of high wage earners have the most to gain by providing the needed info and avoiding the restart. For example, an employee earning a taxable income of $200,000 will typically reach the Social Security max of $7,254 by the August time period (if the employee has no pre-tax deductions). If the employer company moves to a PEO in August and does not provide their PEO partner with the information required, that employer would be subject to restarting the Social Security tax – up to an additional $5000 – even though they may have reached their max levels already. At the end of the year, employees who have had taxes restarted will be able to obtain a refund/credit for the overages paid for the year when filing their tax returns, but the company will not be eligible for the refund.