This happened to an employee that I supervise. In November of 2015 he decided to claim Married and 99 on his W4 so he would have a little extra spending money around the holidays - he regularly received a large tax refund so it wouldn’t matter too much when he filed his taxes. Along comes January and he changes it back to his standard settings of Married and 4.
The W4 was sent to our payroll department which proceeded to input the change - the box on his weekly pay stubs changed from “M 99” to “M 4” to indicate the change, but payroll never clicked on the box to have the taxes actually start being withheld. Federal taxes and state taxes did not show up on his pay stubs, but he never bothered to look beyond the “M 4” and assumed that the increase in his net pay was due to a significant raise that he received at the same time that he made the change. For the entire year of 2016, they withheld $0 for state and $0 for federal taxes.
Obviously he should have paid closer attention and caught this mistake sooner, but after looking through IRS Publications and doing multiple web searches we are seeing conflicting information. One place will say that the employer has 30 days to implement any changes made to W4’s and are liable for any taxes due if they failed to withhold the amount as directed. Another place will say that the individual is solely responsible for his tax debt and better start making arrangements to pay what he owes. Instead of his usual $3000 refund, he now will have to pay close to $9000 between state and federal, not news that anyone would want to hear. So, does anyone know the right answer?
Off the top of my head, as an employer, I’d say that both sources are right - the employer is liable to fix and report the discrepancy as well as pay the employer’s portion of the withholdings and any penalties for their lateness. The employee is still on the hook for their part of the withholdings (the amount that would have come out of their check in a year). I can’t imagine the employer or employee has to pay both but neither of them have to pay neither.
What employer’s portion of the withholdings? Employers contribute to Social Security and Medicare, but they don’t pay anything at all towards the employee’s federal income tax, and SocSec/Medicare aren’t affected by the number of deductions on the W4.
In this case, the employee is going to be on the hook for the amount due, although they can probably get out from under any penalty assessed for underpayment. The employer would normally be required to send in the amount that should have been withheld, but can ask for relief by filing Form 4670. If they don’t ask for such relief, the employer can make up the money by withholding extra sums from paychecks later in the year, but I believe that option is foreclosed once the tax year closes.
I wonder if the employee can sue the employer for their negligence on this. Of course that could lead to the unemployment line so maybe it’s not a good idea.
Something doesn’t sound right here. So on the paycheck stub, it reads: “M4” but it wasn’t actually with holding taxes?
That’s either some really crappy software HR is using, or the guy in question isn’t being completely honest.
In any case, dude is on the hook. He shouldn’t worry too much though, the IRS would much rather set up payment arrangements than to press an charges.
I (embarrassingly) speak from experience.
He brought in his pay stubs and they definitely say “M 4” on the top, but no taxes taken out. The payroll department found the updated W4 and basically said “Sorry, we’ll get that fixed right away”. Not sure what software is being used or how this could actually happen, but the company we work for has over 1000 employees so hopefully it didn’t happen to anyone else.
The employer is certainly on the hook for the taxes he owes … and that’s the matching funds for the SS tax at a minimum … penalties and interest as well if these were due quarterly … I’m at a loss as to how the number of exemptions effects the SS rate … I thought that was based on earnings and not adjusted gross income … so something smells a little fishy there …
The employee is certainly on the hook for the income taxes … no doubt about it if the 1040 says pay $9,000 … then write the check … however penalties and interest may not apply as this wasn’t exactly the employee’s fault … how the employee didn’t notice is again smelling a little fishy …
“Married with 99 exemptions” … huh? … that smells like a fish after a bear is done digesting it …
As a general rule … everybody should verify their paychecks … make sure it’s right and don’t wait a year to correct it … a $9,000 tax bill is a nasty surprise … and it happens … I feel sorry for the person but they cannot be held completely blameless in this situation …
It’s 100% legal and 100% kosher. Under the right circumstances. Which indeed the OP’s employee had. At least at the end of the previous year, although not all throughout the year he didn’t “notice” the mistake.
It’s actually 99 “allowances”. The number you put on the W4 form is not the number of tax exemptions you claim when filing your return. It’s a completely different quantity of a completely different thing called an “allowance.”
By design, IF you have exactly one job all year AND you don’t itemize AND you have negligible other income AND [(you are either single and file taxes single) OR (are married and file taxes jointly and have a non-working spouse)] THEN if you ask for the number of allowances equal to your number of tax exemptions (self, spouse, dependents) you’ll find your refund is about 10% of your tax bill. By design.
If any of those details aren’t true for you, then the number of allowances you can and should claim is different. Maybe more, maybe less. The instructions that come with the W-4 form describe essentially how to rough out your expected taxable income, determine your expected total tax, then fill in *whatever number of allowances *causes your expected withholding to match your expected taxes. Less any estimated payments you plan on making.
Many people do the 99 towards the end of the year trick. If your wages are highly variable or your spouse works part year it can be difficult to estimate this stuff accurately 12 or 14 months in advance. So you do normal vanilla withholding at first and along about September or October evaluate again and if you look over-withheld, stop it now and collect much of your “refund” during Nov & Dec in the form of increased take-home pay rather than waiting to after your taxes are filed to get it back from the IRS.
Folks who do the 99 move also need to be careful not to let it ride. That way leads to penalties and interest.
To be sure, HR screwed up and the guy was a dumbass for not noticing, or not “noticing” the mistake. But IF setting 99 (or 25) allowances is what it takes to make your annual estimated tax payments + withholding work out right, THEN 99 or 25 is the legal, correct answer to put on the form.
I’m with RedSwingOne on this. What, did he think he got a $1000 a month raise? For someone familiar enough with the tax system to adjust his allowances to get the outcome he desires, and re-adjust at some point to fine tune it, and then to not notice a huge jump in pay is really odd.
Social Security, Medicare and the other miscellaneous deductions were made normally - I think those are fixed percentages based on your income and don’t change based on the number of allowances you claim on your W4. It was only Federal taxes and State taxes that weren’t withheld.
Yes, he definitely should have noticed long ago. Many of the people at our company don’t check their pay stubs unless something looks really wrong - with his raise coming at the same time as the W4 change he (wrongly) assumed that all was good. Our pay stubs are sent via e-mail and instead of opening them he would just drag them into a separate folder and forget about them. He’s definitely looking at them now though!
When I started my current job, I negotiated a salary that was $10K higher than the initial offer. The person doing the hiring approved the higher number, but nobody told the payroll department in the home office, so I was paid the “offer” number from my start date in May to late December.
I never received a hard copy paycheck or copy because the employer uses an online payroll document system, and the password they gave me was wrong, so I never saw what my gross earnings were. The offer number was a very sizable increase from my old job salary, and I changed my withholding from married/one allowance to “withhold at higher single rate” to make sure we didn’t get a nasty surprise at tax time. I finally got the password changed in December because I needed to get into the payroll system to roll over my old 401(K), and realized I was being underpaid.
So it’s certainly possible to not notice missing (or extra) earnings in amounts like that, provided it’s not a huge fraction of your take-home pay. If the guy earns $25K a year, then yes, it’s fishy. If he earns $100K? Plausible.
Must be recent … it’s been 25 years since I fill one out … seems to me the maximum was 13 back then, which was always enough so I never pushed it … I make it a point to owe at the end of the year … seems whenever I’m due a refund, the IRS dreams up some rinky-dink reason to withhold some of it … never seems a problem when I have to write the check … not that the IRS makes mistakes, they never do, just I like to give them less opportunity to be right …
I rarely look at my checking account balance or statement, let alone the value of what few individual lines there are, but even then I doubt I could go an entire year without noticing that.
But I asked a passing HRer about it and she agreed the company wouldn’t cover the missed taxes.
Well, as the employee has the $9000, the company had better just inform the IRS and try to pay the 10% late fee. (There’s a late fee of 100% if its deemed to be willfull. I guess they only do this when its a clear stealing, cash flow crisis or phoenixing situation.)
Also, tell the employee that the employer will pay any penalties the employee incurs from the various fed and state agencies due to this error .
We seem to be overlooking that he fraudulently claimed his dependents as “99” to begin with. Deciding to remit withholdings sometimes and not others isn’t how it is supposed to work.
It’s not fraud … the employee was getting a refund in the prior tax-year … his full tax liability was paid when he upped the amount to 99 … he then requested it to be dropped to 4 again for the tax-year in question …
Indeed the IRS asks that we try to get our withholdings close … but that’s not always easy to do … in the case in hand, the employee maybe should declare 5 … $1,000 a month withholding and he gets $3,000 back … better to withhold $750 a month and have no refund … as long as we pay the tax, it’s not fraud …