The IRS has been running into issues with businesses neglecting to remit taxes withheld from workers. Employers and employees hold the responsibility for collecting and remitting withholding taxes to the IRS. More often than not, the employer withholds these taxes on behalf of the employee, but in cases where an employer does not do this (or where an employee is self-employed) it is the employee’s responsibility to pay these taxes.

First thing’s first—employment taxes vs. payroll taxes

Employment taxes are:

• The federal income tax withheld from employee pay.
• Federal unemployment taxes (FUTA tax) paid by employers based on number of employees and unemployment rates.
• Social Security and Medicare taxes (called "FICA taxes") withheld from employee pay.
• The Additional Medicare tax enforced on higher-earning employees.
• Self-employment taxes, (the Social Security and Medicare taxes) paid by self-employed business owners.

By "payroll taxes" the IRS means solely Social Security and Medicare taxes withheld from employee pay and matched by employers.

Responsibilities for employers & employees

Employers

On Form 941, Quarterly Federal Tax Return, employers must report income and employment taxes withheld from their employees and deposit these taxes in full to an authorized bank or financial institution. Employers are also required to file a FUTA return every year and deposit those taxes, too.

Penalties

There are criminal and civil sanctions for employers who willfully fail to pay their employment taxes.

Employees

Employees who do not have taxes withheld, and those who do not remit them personally are STILL liable for the taxes. Without paying these taxes, these employees may not qualify for Social Security, Medicare or unemployment benefits.

What if an employee is concerned that his/her employer is failing to withhold?

Employees with this concern (improper or failed withholding on the part of the employer) can and should report their employer by contacting the IRS (1-800-829-1040).

In situations where the employer did withhold employment taxes but neglected to deposit them (or failed to issue W-2s), the employee should request the W2 from his/her employer. If this does not work, the employee can complete and attach Form 4852, the substitute for W-2, to their tax return. The employee can gather information regarding wages and withholding from his/her paystubs.

Recent developments

Fighting payroll tax fraud is a high priority for the IRS, and the Department of Justice is pursuing a growing number of civil injunctions against businesses that have frequently failed to deposit taxes withheld from their employees. Serial offenders like these cannot transfer assets or establish new businesses until they pay their employment taxes (in full) and notify the IRS after making payroll deposits.

Questions on your tax responsibilities? Contact any member of our Tax Services Team.