May 25, 2008

Q & A: Underwithheld Payroll Taxes

QUESTION: My employer failed to withhold income tax, etc. from another employee (because of a mistake). The employer paid the IRS but wants to consider collecting from my co-worker. Publication 15 (2008), page 29, says reimbursement is between the employer and the co-worker but the sentence I can't understand reads as follows: "Underwithheld income tax must be recovered from the employee on or before the last days of the calendar year."
My question is, WHICH calendar year, the one we're in (2008) or the one in which the taxes were due (2007). I can't find an answer on the internet but your blog makes me think you could tell me how to find out. I would appreciate any help I can get.

ANSWER: The payroll taxes in question must be recovered from the employee by the end of the calendar year for which the underwithholding occurred. In this situation, it would be the 2007 calendar year. Additionally, the employer is responsible for paying the correct amount of withholding taxes to the IRS even though the insufficient amount was taken from the employee's paycheck.
Your reference to IRS Publication 15, Employer's Tax Guide (and commonly known as Circular E), prompts us to recommend it as a great resource for employers and employees alike. It can be viewed and downloaded from the IRS web site at

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