Most of us who work nine-to-five jobs (are W-2 wage earners) expect our employers to withhold enough taxes for us so that when April comes around, we get money back from the IRS. , or at the very least do not owe the IRS.
When we file our return and find we owe taxes because our employer messed up or did not pay our taxes, it can be a bit of a shock. Here are some common reasons employers messed up taxes or didn’t pay taxes, and what you can do to fix the issue. (Read more: “Can I get a refund if I owe back taxes?”).
Why Did My Employer or Payroll Not Take Out the Right Taxes?
Employers withhold taxes throughout the year for W-2 employees, and if they do it right, the money is usually enough to cover the employee’s tax liability for the year.
But they occasionally get it wrong. When they do, it is usually for one of these reasons:
Employer Reported Wrong W-2 Wages and Withholding
If an employer calculates an employee’s tax withholding based on the wrong wage or salary, it can result in an underpayment. This sometimes happens when an employee received a promotion or pay raise during the tax year and the employer failed to adjust the employee’s tax withholding after.
Employee Provided Inaccurate W-4 Tax Withholding Information
When an employee takes a job, they are usually asked to fill out tax related forms on their first day. These forms allow HR and payroll to set up the employee’s tax withholding. On one of these forms, IRS Form W-4, the employee is asked to provide information that can affect how much tax is withheld.
In the past, employees could specify a certain number of “allowances,” each one reducing the amount withheld from each paycheck.
The IRS changed the W-4 form in 2017, however, and now employees must claim dependents to lower their tax withholding. If an employee claims more dependents than they have, it can result in an artificially low withholding amount and an unpaid tax balance in April.
Employer Misclassified Employee as Independent Contractor
If an employer misclassifies an employee as an independent contractor, it can cause a payroll tax issue. Payroll taxes are considered separate from federal income taxes. They fund entitlement programs such as Social Security and Medicare.
An employer is required to pay half of an employee’s payroll taxes, but an independent contractor is responsible for theirs in full. Misclassification may result in failure on the employer’s behalf to pay its portion.
Employer Didn’t Pay Share of Medicare and Social Security Taxes
An employer might mistakenly fail to pay its share of an employee’s Medicare and Social Security taxes, which are the same as payroll taxes.
The most common reason is the one described above — the employer misclassified the employee as an independent contractor.
Am I Responsible if Payroll Messed Up My Taxes and I Now Owe Money to the IRS?
In most cases, you still owe the taxes to the IRS even if your employer or payroll department was the one who messed up by not withholding enough taxes during the year. The one exception is if your employer either intentionally or accidentally misclassified you as an independent contractor when you are an employee.
In this case, your employer should be liable for your unpaid payroll taxes. (Schedule a free call to see how we can help).
If I Owe the IRS Taxes Because My Employer Messed Up, How Do I Settle My Tax Debt if I Can’t Pay the Full Amount?
There are several ways to settle tax debt with the Fresh Start Program if you cannot pay taxes you owe the IRS. For example, you can submit an Offer in Compromise to the IRS. If the IRS accepts your OIC, your offer settles the entire tax debt for an amount less than what you originally owed.
Other current tax relief options include setting up an IRS installment agreement (IRS Payment Plan) to make smaller monthly payments over time or requesting Currently Not Collectible status to temporarily delay IRS collections due to financial hardship.
How Can Wiztax Help?
We can help with all kinds of payroll tax issues. Call us today at (866) 568-4593 to learn more about payroll tax relief services and costs.
Or start here to take our free online evaluation.
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