All employers must collect withholding taxes
Under IRC § 3402 every employer must deduct and pay over withholding taxes for all employees (including religious organizations and governments). Employee status is generally determined on common law principles.
FICA imposes a tax on employees and employers measured by the amount of wages paid. There are 2 components:
- Old-age, Survivor and Disability Insurance (OASDI) 6.2% (subject to cap)
- Hospital insurance (HI) 1.45%
“Wages” for employee are subject to withholding when paid for by the employer and actually or constructively received, including non-cash compensation.
The employer is liable for the employee’s portion WHETHER OR NOT WITHHELD, but is indemnified against claims and demands of employees for amounts paid over to the government.
An employer’s liability for the employee’s portion for persons treated as independent contractors is limited under § 3509 to:
- 20% (1.53%) if all information returns required were filed in a consistent manner and
- 40% if all returns were not filed,
- 1) intentional disregard;
- 2) taxes withheld;
- 3) the employee is a statutory employee
Erroneous treatment as non-employee
Liability is determined under IRC § 3509 for erroneous treatment as non-employee – 1.5% (3% if certain reporting requirements disregarded) of wages.
The liability is the amount that should have been withheld, but subject to credit for amounts actually paid by the employee.
Inadvertent failure to withhold
IRC § 6205 provides RELIEF for INADVERTENT failure to withhold if a timely supplemental return is filed and the tax is paid (interest and penalty free).
“Deemed” employers are persons having legal control over payment of wages other than actual employer – IRC § 3401(d)(1) (creditor, bankruptcy trustee, union, etc.).
“Authorized” agent – IRC § 3405
“Third party payors” – IRC § 3505(a) (lender, surety etc.) – person advancing funds to enable employer to pay wages if 1) knows advances will be used to pay wages; and 2) knows employer does not intend to or is unable to pay tax (i.e., “net” wage loans) (limited to 25% of amount supplied – court cases say the limitation includes interest
Amount of withholding
The amount of withholding is determined based on the employee’s W-4 declaring the number of allowed exemptions and allowances, and may include the following methods:
- Wage bracket
- Supplemental (commission, bonus, etc.)
- Concurrently with other pay determined in the aggregate
- Added to the current or last payroll period
- Average wage for each period for which the supplemental payment relates dividing by number of periods and as if actually paid during each applicable period
- Using “other permissible methods” (limited deviation from standard methods)
- Tips must be withheld and reported by employer unless none are reported by the employee in a written report pursuant to IRC § 6053(a) (subject to the amount of tips within employer’s control, applied to social security first)