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Common Paymaster Rule for Contractors With Related Companies
Common Paymaster Rule for Contractors With Related Companies
If you own two or more related corporations and the same employees work for both, the common paymaster rule lets one company pay those employees and figure Social Security and federal unemployment (FUTA) tax as if there were only one employer. Without it, each company starts the employee’s wage base over from zero, so the group can overpay. The rule comes from IRC §3121(s) and §3306(p) and Treas. Reg. §31.3121(s)-1.
The problem: every employer restarts the wage base
Social Security tax is 6.2% from the employer and 6.2% from the employee, up to a yearly wage base. For 2026 that base is $184,500, per the Social Security Administration. FUTA applies only to the first $7,000 paid to each employee in a year.
The IRS explains that when related corporations employ the same people at the same time, each one may apply its own wage base. That is common in construction: you spin off an equipment company or a new division, and your project manager or office lead ends up on two payrolls, each counting from zero.
The employee can usually recover excess Social Security withholding as a credit on their personal return (IRS Topic 608). The common paymaster rule is what keeps the employers from overpaying.
Which companies count as “related corporations”
Under the regulation, corporations are related for a calendar quarter if they meet any one of these tests at any time during that quarter:
- Ownership: they are in a controlled group under IRC §1563, using a more-than-50% threshold in place of 80%.
- Nonstock corporations: at least half of one board sits on the other’s, or voting power overlaps as the regulation describes.
- Shared officers: at least 50% of one corporation’s officers are officers of the other.
- Shared employees: at least 30% of one corporation’s employees work for the other at the same time.
The regulation and the IRS page are written for corporations and do not address LLCs or partnerships. If one of your companies is an LLC, confirm how it is classified for federal tax purposes before relying on the rule. Entity choice matters here, as it does in our comparison of QSub vs. LLC structures.
Requirements for a valid common paymaster
- It must be one of the related corporations. An outside company does not qualify.
- Concurrent employment. The person works for two or more of the corporations at the same time, the work benefits each one, and each can deduct the pay for federal income tax purposes.
- All of the person’s pay goes through the paymaster. It does not have to pay every employee in the group, only the shared ones in the arrangement. Only pay by money, check or similar instrument counts.
- Books and records. The paymaster keeps the payroll records for those employees, files the employment tax returns and issues the Forms W-2 for the wages it is treated as paying.
How the math works: a simple example
Take a hypothetical project manager paid $120,000 by Company A and $120,000 by Company B in 2026. The companies are related corporations.
| Employer Social Security tax, 2026 | Two separate payrolls | Common paymaster |
|---|---|---|
| Wages subject to Social Security | $120,000 + $120,000 | $184,500 |
| Employer tax at 6.2% | $7,440 + $7,440 = $14,880 | $11,439 |
| Extra employer tax | $3,441 (6.2% of the $55,500 above the wage base) | None |
The same $3,441 is over-withheld from the employee under two payrolls. FUTA follows the same logic on its $7,000 base. Medicare tax (1.45% each from employer and employee) has no wage base, so it is the same either way.
What the rule does not do
- It does not reduce Medicare tax.
- It does not decide who is an employee; it applies only to people already employed by each company. See our episode on worker classification for contractors.
- It covers FICA and FUTA. The regulation does not address federal income tax withholding.
- It does not free the other companies. The paymaster is liable for the full tax, and each related corporation is jointly and severally liable for its share if the paymaster fails to pay.
California: figure UI, ETT and SDI separately
We found no EDD guidance recognizing a common paymaster arrangement for California payroll taxes. EDD states the UI and ETT wage limit as $7,000 per employee per calendar year, and since January 1, 2024, all wages are subject to SDI. Unless EDD tells you otherwise, figure California payroll taxes separately for each employing entity. Other states set their own rules; Texas, for example, requires related corporations to file a common paymaster plan with its workforce agency.
Common pitfalls
- Companies that aren’t related. Recheck the tests after any ownership or officer change.
- Paying from the wrong entity. If the second company cuts a check directly, that person’s pay no longer runs entirely through the paymaster.
- Weak documentation. When records show each company’s share of the pay, the tax is allocated by that share; without them, the IRS can allocate it another way. Keep a written agreement and book intercompany charges each pay period.
- Multistate crews. Check each state where shared employees work.
These are among the payroll mistakes we see in construction businesses. Our contractor payroll health check is a good place to test your setup.
Frequently asked questions
What is a common paymaster?
It is one of a group of related corporations that pays employees who work for two or more of them at the same time, so Social Security and FUTA tax are figured as if there were one employer.
Can an LLC use the common paymaster rule?
The regulation and the IRS page are written for corporations and do not address LLCs, so confirm the entity’s federal tax classification before relying on it.
Does a common paymaster reduce Medicare tax?
No. Medicare tax has no wage base, so it is the same either way.
Does California allow a common paymaster for UI and SDI?
We found no EDD guidance recognizing it, so figure California payroll taxes separately for each employing entity unless EDD tells you otherwise.
If your companies share employees, book a consult and we’ll look at whether a common paymaster fits your structure.
Sources: IRC §3121(s) and §3306(p); Treas. Reg. §31.3121(s)-1 and §31.3306(p)-1; IRS, Common Paymaster; IRS Topics 608, 751 and 759; Social Security Administration, Contribution and Benefit Base; California EDD, Rates and Withholding; California EDD, Determine Taxable Wages; Texas Workforce Commission, rule §815.117.
This article is general information, not tax or legal advice for your situation.
Disclaimer: This content is provided for educational purposes only and is not legal, tax, accounting, or financial advice. Every situation is unique, so consult your own attorney, CPA, or financial advisor before making decisions based on this information.
