Payrolling

What is payrolling?

Payrolling is a practice where a legal entity reports wages paid to another legal entity's employees as its own. This practice is not allowed under state and federal law.

While a few employers misreport wages to avoid paying higher tax rates, most employers misreport for the ease and benefits of consolidating their payroll. Some taxing agencies may allow for consolidating payroll. However, for unemployment purposes, employee wages must be reported under the Wisconsin Unemployment Insurance Tax Account assigned to the legal entity for which those employees perform services.

It does not matter which legal entity pays the wages or whether one legal entity reimburses another for the wages paid. The definition for determining the acting employer for unemployment tax purposes can found under Wisconsin Statute 108.065.

Why is reporting under the correct legal entity important?

Employer tax rates are based upon experience rating of a particular business. This experience rating and tax rate information can follow the business activity if that business activity is transferred to another legal entity. In the case of payrolling, the actual business activity and assets are not transferred and therefore the experience rating cannot follow that business even if they have common ownership. Likewise, if a business is sold, the account experience cannot transfer to the new owner since the new owner did not purchase any business activity or assets belonging to the payrolling entity.

There are only a few specific situations that allow for employees performing services for one legal entity to be reported under the account of a different legal entity:

1. Temporary Help Company
2. Professional Employer Organization
3. Common Paymaster (Only applies to corporations and LLCs taxed as corporations)