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socrateaser
socrateaser, Lawyer
Category: Tax
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Experience:  Retired (mostly)
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I worked for a startup company (a C corporation) as a full

Customer Question

I worked for a startup company (a C corporation) as a full time employee. Some months I was paid properly by payroll and this money is accounted for in a regular W-2. However, on some months (due to company cashflow problems) the CEO wrote me checks (from the company bank account) saying it was be treated as a paycheck advance after the next investor round. In one case this happened correctly (matching taxes were paid to IRS and the payment was included on my W-2). However, in other cases, the company has not yet paid the matching taxes to the IRS, as my standard withholding would require. The company is likely to declare bankruptcy soon. The CEO recognizes the original intention of the checks, and is willing to file paperwork somehow to indicate that the taxes are owed by the company, not me, in keeping with regular company-tax-withholding. But he does not know what to file, and he cannot get much help from payroll since the company is probably going to default on payments to them. I would guess this might be part of the company's bankruptcy filing. Is there any way, with the CEO's cooperation, that the company can claim responsibility for the taxes on these checks, and have it considered toward the company's debt on bankruptcy? Could he just write a corrected W-2 by hand? How do I declare this income if they don't get a W-2 to me in time? (I deferred in April when I found the numbers didn't add up.)
Submitted: 11 months ago.
Category: Tax
Expert:  socrateaser replied 11 months ago.
Hello,

The failure of an employer to properly deduct and remit payroll taxes is one of the most serious errors that any taxpayer can make. In addition to the taxes due, the employer and any person who was personally responsible for remitting the taxes, will be assessed a 100% penalty to the IRS for the failure. And, there is no escape for the responsible person, because the obligation avoids the corporate "veil" as it's called in legal parlance.

If you were paid, then even though your W-2 may be incorrect, you have an obligation to report and pay your income taxes. When you file your tax return, provide the W-2 that you are given by the employer, but report the total amount you received as wages. The IRS computer system will flag the error and you will be sent an audit letter. You will explain what happened, and the IRS will go after the employer for the unremitted taxes.

if you want to be sure that you have the money to pay your taxes and you do not want an underpayment liability, then you can remit a tax payment to the IRS now, for the wages you have already received. You can calculate your tax liability by using software at this link. You can file your tax payment with a 1040-ES voucher.

Please let me know if my answer is helpful. And, thanks for using justanswer.com!
Customer: replied 11 months ago.

 


This is useful, thanks. XXXXX am still confused about the process of reporting my taxes. I understand that I should include the W-2 I was given, and that I have to report the other income I was paid. If I understand you correctly, it sounds my employer cannot escape this payment when declaring company-bankruptcy, and he will be personally liable for the error. But it is still his responsibility for the money that was not withheld for the IRS, not mine?


 


In other words, when I calculate my taxes, can I pay "as if" the checks I received were given to me "after taxes", like paychecks are normally given, with the same withholding ratio that payroll usually takes, or do I have to count the checks I received as being payment "before taxes", making me liable for paying extra taxes? The checks were less than my usual salary after-taxes, and the verbal understanding from the employer was that they were an after-tax payment (and that the company would straighten up the their tax obligations and that wasn't my problem).


 



 


-Mark


 

Expert:  socrateaser replied 11 months ago.
This is useful, thanks. XXXXX am still confused about the process of reporting my taxes. I understand that I should include the W-2 I was given, and that I have to report the other income I was paid. If I understand you correctly, it sounds my employer cannot escape this payment when declaring company-bankruptcy, and he will be personally liable for the error. But it is still his responsibility for the money that was not withheld for the IRS, not mine?

A: Every taxpayer is liable for taxes owed. The employee is not liable for taxes on wages, if the employer withholds but fails to remit the withholding to the IRS. But, here, the employer has paid you as if you were self employed, without treating your income as wages. Consequently, you're liable for the tax, until the IRS determines otherwise.

In other words, when I calculate my taxes, can I pay "as if" the checks I received were given to me "after taxes", like paychecks are normally given, with the same withholding ratio that payroll usually takes, or do I have to count the checks I received as being payment "before taxes", making me liable for paying extra taxes?

A: You are liable for the taxes on your income. See my answer above.

The checks were less than my usual salary after-taxes, and the verbal understanding from the employer was that they were an after-tax payment (and that the company would straighten up the their tax obligations and that wasn't my problem).

A: It doesn't matter what the employer tells you. You received $X in wages, and you are liable for $Y in taxes. It may be that the employer later decides that your wages were after tax, and that it will report a W-2 with additional wages and pay taxes so as to protect you from tax. If so, you can amend your tax return to obtain a refund for the overpayment. But, at this moment in time, you have received taxable income, and no tax has been withheld by the employer. Therefore, you are liable for the tax.

Hope this helps.
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 33921
Experience: Retired (mostly)
socrateaser and 7 other Tax Specialists are ready to help you
Customer: replied 11 months ago.

 


This is a great answer, but I was confused when you said the employer was treating me as though I were self-employed. Because if I filed in accordance with that, I would need to pay the self-employment tax and then I'd be paying the employer's side of the taxes (e.g. the second half of social security) on top of personal taxes. This would seem to leave the employer completely off the hook since the IRS would be getting all the money from me. Can I still pay taxes as though it were a salary income? Then the employer would be liable for the unpaid matching taxes owed by the employer?



Alternatively, if I did file my taxes accepting these checks as self-employed income, would the employer still face any payroll investigations from the IRS? It seems like if I did accept this interpretation of the checks (which would be costly for me), that the employer would not be delinquent to the IRS for any unpaid payroll taxes; is that right?



 


Expert:  socrateaser replied 11 months ago.
The reason why I did not suggest that you file as self employed, is because: (1) you would have to pay self-employment tax; and (2) because you are not self employed -- so, filing as such would be perjury, since your tax return is certified under penalty of perjury.

You are an employee whose employer is violating the federal employment tax withholding laws. So, don't get confused by the possibility of filing as if you were self employed -- because you're not, and filing as such would just create a new set of problems for you.

Hope this helps.

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