Payrol Taxes

[UWGBaccountingstudent]

I was working for the company around six years. I got W-2 forms and filed my tax returns. but apparentlly my employer forgot to withold my Social Security taxes such as FICA and MEDFICA. I received a letter from Social Security, and immediatelly notified my employer. They contacted Social Security Ofice and now they are telling me that I have to pay somewhere around $5,000 in taxes back. My question would be do I bear responsibility for it. My employer wants to witheld an extra $100 from my next paychecks. Can they do this legaly withouth court order? Don't they have to cover all of theese cost because they did a mistake? Now accumulation of these taxes are very big burden for me because I am a student and I have other living expenses. What would happen if I quit working there? Who would have to pay these money then? Can I sue them and is it worth it? Any kind of adwise will be appreciated.
Thank you in advance.
P.S. By the way I am foreign worker, I had no idea what kind of taxes my employer should off withold.

[Golden Rocket]

Initial Liability

Green Bay student,

The IRS holds the company responsible for these taxes, not you. It is their responsibility to withhold from your pay for FICA and Medicare, and if they don't withhold from you, they still have to pay. The IRS will come after THEM first.

The next question is whether having paid the IRS, the employer can force you to pay back the portion which should have been withheld. I wouldn't know that -- I'm not sure very many of us would know in situations where the employer claims indemnification from employees for amounts that should have been withheld.

If you are foreign, there may also be an issue with your social security number. My response above does not take this into account if there is such an issue.

[Bees Knees]

Yes, the employer can withhold FICA from current wages for prior years.

Yes, you can quit your job.

Yes, the employer is responsible for the FICA taxes they should have withheld from you.

Yes, the IRS can also collect that tax from you if they have trouble getting it out of the employer.

[Bees Knees]

A side note...If the employer winds up paying the FICA for you (because you quit your job before they could collect all the back FICA from you), you are now subject to income tax on the amount the employer paid for you. That amount is also subject to FICA, and if the employer also pays that amount for you, you are also subject to income tax on that amount. And since that amount is also also subject to FICA, and the employer also also pays that amount for you, you are also also subject to income tax on that amount. And since that amount is also also also subject to FICA, and the employer also also also pays that amount for you, you are also also also subject to income tax on that amount...

And so on...and so on....and so on....

[Golden Rocket]

Infinity - etc. etc. etc.

The Bees Knees scenario mentioned above is illustrated below in a true-to-life circumstance where there is no end to the "gross-up" feature of taxation.

Years ago a co-worker of mine relocated from somewhere in Texas to Huntsville, AL. Our employer had a relocation package designed to attract premier executive-type employees. The personnel director told the guy to find a tax man in Huntsville and find out what the taxes would be on $35,000. In those days, the totality of the relocation package went on the W-2, and for a couple years, form 3903 was an itemized deduction available ONLY to those who itemized.

According to company policy, the company would "gross up" the tax by paying a bonus on the taxable effect to the new employee. The guy soon found a tax man (I would not do co-workers for conflict-of-interest reasons). He came back in a couple days and asked the company for $10,000, and just from the raw numbers, that sounded about right although I didn't have all the details. The company told him they would "gross up" his pay by this amount.

A couple days later, the guy came back and asked for another $3000. At first, the company hesitated paying this, but the wording in the company personnel manual was such that he was to be "compensated to the extent necessary to negate all income taxes." So the company agreed to pay him yet another $3000.

Before the session was over, he calculated yet another $900 tax on the last $3000. Finally, the company balked. There was no end to spiraling effect. Speaking practically, there is no final resolution to a situation such as this.

In those days, livable pay and strong benefit packages were a way of life. Nowadays, companies who pay their people this well are going out of business and giving way to the Wal-Marts, the Home Depots, etc. who have flourished by keeping wages barely above minimum wage and fringe benefits for only their management groups.

[Bees Knees]

There is a point where the additional FICA tax is too small to produce one extra dollar of tax. At that point, the gross up ends, and you can stop the calculation.

TTB, page 23-9 has a gross up worksheet that makes this calculation in one easy step.

[JohnH]

One company I know of

If you've ever worked through a moving expense reimbursement handled by Weichert Relocation services, you have probably seen a masterful job of doing the entire calculation. Some of the major companies use them, and they have an impressive worksheet. It even nets out the tax savings achieved on the Fed return by adjusting for the Schedule A deduction for the state income tax gross-up. The ones I've handled also leave the door open for the employee to submit a claim for additional compensation if his/her actual tax is different - I suppose that comes into play if AMT enters the picture.