Misclassification of W2 employees as 1099 subcontractors with seller

January 16, 2025

by an investor from Queen's University in Toronto, ON, Canada

Anyone know a lawyer or tax accountant who has dealt with this in an acquisition? Seller didn't pay the full amount in payroll taxes.. wondering how this liability transfers to the buyer

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Reply by a professional
from Harvard University in Lynbrook, NY 11563, USA

Liability for Payroll taxes can travel even in an asset purchase and even if you explicitly don’t assume them, especially at the state level where this is often explicitly provided for by statute. The facts of your purchase and the state you’re in need to be looked at closely. You should get a rough sense of the exposure here, and then consider a mixture of having the seller clean it up by voluntary disclosure and getting a tax clearance certificate or the like from the state and having a strong uncapped indemnity that covers through any statute of limitations (if any) or indefinitely, backed up by an escrow, holdback, or note. There are other considerations/mitigations depending on your facts and state so you should definitely get specific advice.

Reply by a professional
from York University in Toronto, ON, Canada

Yep, dealt with this in context of a partial sale of the business. Identified the issue during due diligence and did a holdback + indemnity.

Will depend on laws of relevant jurisdiction but as a general thought not legal advice, on the stock sale you've inherited the liability, on an asset sale, anything relating to the pre-closing period should have been explicitly made an excluded liability that the buyer isn't taking on.

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