In a program manager technical assistance memorandum (PMTA 2018-015
), the IRS Office of Chief Counsel addressed an employer’s withholding and reporting obligations when the employer failed to properly report compensation to an employee and withhold federal income and FICA taxes in a prior year. The memorandum also addressed the tax implications for the employee.
In 2018, the IRS identified during examination that $10,000 of taxable fringe benefits provided by the employer to the employee in 2016 were not properly included in the employee’s wages subject to employment tax withholding, nor was the $10,000 reported on the employee’s 2016 Form W-2. In the memorandum, the IRS concluded that it is authorized to assess against the employer in 2018 both the employee’s and employer’s share of FICA and federal income taxes that should have been withheld in 2016.
Generally, the employer has the obligation to withhold and remit payment to the government of the employee’s share of federal income taxes. According to Section 3403, the employer is liable for the payment of federal income tax withholding to the government regardless of whether the income tax is withheld from the employee. However, because the income tax withholding assessed in 2018 was not tax actually withheld from the employee in 2016, the employee receives no credit against his or her 2016 (or 2018) income taxes reported on the employee’s Form 1040, “U.S. Individual Income Tax Return.” The employer is required to report the additional $10,000 of wages on a 2016 Form W-2c in Box 1, but no amount of federal income tax is shown as withheld in Box 2.
The employee is separately liable for the resulting income tax when he or she files a 2016 Form 1040X to report the additional $10,000 of compensation. Furthermore, the regulations do not allow the employer to recover the federal income tax withholding it paid in 2018 from the employee. The employer’s payment of the income tax withholding liability thus does not create additional compensation to the employee in 2016 or 2018. If the employee ultimately pays the income tax on the $10,000 by filing a 2016 Form 1040X, the employer is not liable for the income tax that should have been withheld in 2016.
For FICA tax purposes, the employee is ultimately liable for the tax, although the employer is also liable to withhold and remit the employee’s share of FICA tax to the government. Once the employee’s share of the FICA tax is paid, whether by the employee or employer, the employee receives credit for his or her portion. However, the employer’s 2018 payment of the employee’s 2016 FICA taxes is not additional compensation to the employee for 2016 or 2018, provided the employer seeks repayment of the FICA taxes from the employee or otherwise deducts the employer-paid amounts from other remuneration of the employee. If the employer does not receive repayment of the FICA taxes from the employee, its payment of the employee’s share of 2016 FICA taxes constitutes additional wages to the employee in 2018, which is also subject to employment tax withholding in 2018. The employer is required to report the additional $10,000 of wages on a 2016 Form W-2c in Boxes 3 and 5, and the employee’s share of the FICA taxes paid by the employer is reported in Boxes 4 and 5, as applicable.
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