Form W-4 Exempt Error…Whose at Fault? Who Should Pay?

The Form W-4 is one of the basic forms that payroll must handle during the course of a normal payroll processing. But that doesn’t mean it is not an important document that needs to be processed with care and diligence.  And as with all things, payroll is human and can make mistakes.  But if a mistake is made on inputting a Form 2016 form W-4 face onlyW-4–say going from exempt back to having taxes withheld– who should “pay” for the error…the employee who didn’t catch the error for the entire tax year, or the payroll person (employer) who made it and didn’t follow up with an edit?  This is one of those questions that seems like it can go either way.  For some will respond (usually payroll professionals) by saying that the employee should have noticed that taxes were not being withheld and said something before the end of the year.  But others (usually the employee) will say it is payroll’s fault therefore they should be responsible for my taxes being correct since I did submit a valid Form W-4 as required by the IRS.   It can be argued that since the employee was not deprived of any money he should have the means to pay his taxes. However, that being said, the catch is if the employee is underwithheld the IRS can assess a penalty against the taxpayer (employee). In turn, the taxpayer (employee) could report the employer is at fault for failing to withhold. Under a IRS Office of Chief Counsel letter released on 9/30/11 it appears the IRS would side with the employee as regards to the penalties. See the excerpt from the letter below.

So what is the answer to the question?  Unfortunately it is the same as with all payroll questions…avoid making the mistake in the first place.  Don’t take the “easy” tasks for granted. Have edits in place to ensure that all Forms W-4 are audited before and after they are input into the payroll system.  And as I have always done on my payrolls after finding out that my staff has made such mistakes, implement a program to verify all exempt employees each quarter not just unless the employee complains. I have found that running a list of exempt employees each quarter and taking the extra time to verify they still want to be exempt goes a long way towards catching these errors.  This is especially true during this time of the year when many employees who claimed exempt in 2015 are not doing so in 2016. For this is when the errors are more likely to occur.

irs penalties

The Holidays are Upon Us and for Payroll That Could Mean Taxing Gifts

‘Tis the season for celebrating.  Office holiday parties, year end bonuses and most of all gifts from the company.  Maybe a $25 gift card to help with the holiday dinner or a nice ham or turkey.  The idea of getting something from the boss is a joyous and wonderful idea for most American workers.  But to payroll, the giving of gifts to employees means only one thing, the annual argument over taxation!

The Internal Revenue Code (IRC) requires that any payment made to an employee that is cash or the cash equivalent is taxable wages to the employee.  As stated on the IRS website “Cash or cash equivalent items provided by the employer are never excludable from income… Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable.”

Unfortunately payroll gets to play “The Grinch” when it comes to taxing gift certificates.  But what about an actual ham or turkey or other such item?  Do we have to tax that as well?  On that one we get to play Santa!  No taxation is required on holiday gifts with a low fair market value such as a ham or turkey.

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California Enacting Electronic Filing Requirement for All Employers

The state legislature has passed AB 1245, a bill that requires California employers of 10 or more employees to submit quarterly payroll tax returns and pay the associated payroll taxes electronically over the California Employment Development Department website starting in 2017. The bill also requires all employers to file and pay electronically effective January 1, 2018. The bill awaits the governor signature and he is expected to sign it.

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IRS Announces 2015 Housing Limits for Those Employees Abroad

The IRS has issued the annual adjustments to the housing expense limitation for specific locations for purposes of Code Sec. 911, as amended by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) (P.L. 109-222). Notice 2015-33 provides adjusted limitations on housing expenses for tax year 2015 for purposes of the foreign earned income exclusion and foreign housing exclusion.

WV Imposing Failure to Pay by EFT Penalties

Per a West Virginia State Tax Department website notice, taxpayers required to pay by electronic funds transfer (EFT) will be subject to a 3% civil penalty applied to any payment received on or after March 1, 2015, if the payment is not made by electronic funds transfer (EFT) and a waiver to pay electronically has not been obtained.

VT Increasing Health Care Contributions for 2015

Vermont is increasing the Health Care Contributions for 2015. According to the Form HC-1 instructions that were revised in February 2015, the employer health care contribution for calendar year 2015 is increasing to $140.84 per quarter (up from $133.30 for the third and fourth quarters 2014) for each “uncovered” full time equivalent (FTE) employee in excess of four. The change is effective for the first quarter 2015 return due April 30, 2015.

Alabama W-2 Filing Due Date Changes for 2016

The Alabama Department of Revenue has finalized its proposed change to the due  date for filing Forms W-2 with the state.  The due date has been moved from the current date of February 28 to January 31.  The rule was finalized on March 2, 2015 and takes effect on March 3, 2015.  Since the rule date was changed so late in 2015 it doesn’t affect the 2014 Form W-2 filed in 2015. The due date is still February 28th.  However effective with the Forms W-2 for 2015 filed in 2016 the deadline will be January 31, 2016.