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What Is a Common Paymaster?

Mary McMahon
Updated May 16, 2024
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A common paymaster is an entity that handles payroll and taxes for employees of related companies together. Using this type of payroll arrangement, if a company is eligible to do so, can save money on taxes in some settings. Companies that want to use this option may need to file an application and must provide careful documentation to prove their eligibility. The administration of the payroll also has to be carefully handled to meet regulatory standards.

The first requirement for the use of a common paymaster is that companies are related. This usually occurs with subsidiaries of the same firm. A veterinary clinic, for example, might have a division that offers home clinical visits, a diagnostics lab, and a regular practice, all of which operate independently. If a veterinary technician provides support in the practice and on home visits, this person would be theoretically be paid separately, and payroll taxes would accumulate for both employers.

With a common paymaster, that employee could be paid by a third party payroll department who represents all of the divisions, meeting the next requirement for such arrangements. All employees must be paid by this entity alone, not by individual payroll departments. The paymaster effectively acts like an employer, providing compensation for hours worked, deducting as appropriate, and filing payroll taxes. All of the tax documentation is submitted at once; the veterinary technician wouldn’t receive separate payments and statements for at-home visits and work in the practice itself.

If the regulations for a common paymaster are followed, companies can avoid some excess tax liabilities. The practice can also streamline payroll and billing, which may offer additional savings to the company. For employees, it can provide some advantages by eliminating confusing multiple payments and tax declarations, which can make filing accurate personal taxes much easier. Auditors may periodically review records and practices to confirm that an entity still qualifies as a common paymaster and can be treated as one.

Separate companies without a relationship cannot use this setup for handling payroll. Payments and tax documentation for employees would need to be provided entirely separately. Likewise, if individual payroll departments are maintained, this violates the common paymaster agreement. Companies that want to set up such arrangements may want to meet with accountants and tax attorneys to discuss the plan. They can get specific advice on how to organize the system to stay within the law and maximize efficiency.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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Mary McMahon

Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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