Payroll Tax Mishaps: Employer vs. Employee Responsibility

What happens if an employer doesn’t withhold enough payroll taxes? What are the responsibilities of the employer vs. employee? 

Those are good questions, and it’s important to understand them so you can not only ensure compliance but also educate your team! 

Employers are responsible for withholding income taxes based on each employee’s Form W-4 and turning them over to the IRS. But if the employee provides inaccurate information and insufficient funds are withheld, that’s not on the employer.

Employee Payroll Tax Responsibilities

Employees are responsible for knowing how much they owe for payroll taxes and ensuring the correct amount is withheld from their paychecks by filling out their Form W-4 properly. Even if insufficient taxes have been withheld, employees will still be responsible for paying any taxes owed. 

They could also incur penalties and interest for underpaying estimated taxes since the IRS typically requires taxpayers to pay at least 90% of their tax liability during the year. So although it’s the employer’s responsibility to withhold and remit payroll taxes to the IRS and state, employees are responsible for monitoring their paychecks to ensure accuracy.

When you and/or your employees discover an under-withholding, take corrective action. This could mean adjusting future withholdings to make up for the shortfall. In some cases, you may need to submit additional taxes directly to the IRS. 

Payroll withholding mistakes can lead to disgruntled employees (no one likes an unexpected tax bill!) and a lot of headaches. So even though it’s on employees to check their paystubs regularly, you can help prevent stress and friction by taking a few proactive steps. 

4 Proactive Tips to Mitigate Payroll Tax Errors

Keep Up with Tax Law Changes

First things first, employers must keep up with updates to both federal and state tax regulations that affect payroll taxes. These can include new programs and tax code changes that affect an employee’s status and/or selections on their Form W-4. 

When you understand these important regulatory updates, you can adjust your payroll processes immediately and avoid being behind the ball and potential payroll errors. 

Notify Employees of Updates

Next, be sure to notify employees ahead of time if there are changes in any tax laws OR if your business plans to undergo an upgrade/integration (e.g., implementing a new payroll system or HRIS platform) that could affect their payroll taxes.

Again, be proactive by informing employees specifically what the changes are and how they will affect their income taxes. For example, if your state updates its tax codes, share it with your team and tell them what to look for so they can verify things are correct.

When it comes to anything requiring any data conversion or migration, advise employees to ensure their information is correct by reviewing it in your company’s system. If your organization is large, it may be challenging for your accounting or payroll team to review every single employee’s data. But you can streamline this process by providing steps and/or a walkthrough of the new platform.

Remind Employees to Review W-4s

It’s up to employees to accurately fill out their Form W-4 when they are first hired and update it as needed so you know the correct amount of federal income tax to withhold from their pay. This form is where workers indicate their filing status, deductions, and any additional withholding amounts. 

So yes, employees are responsible for their income withholding selections—but your payroll team can help them out (and maintain a happier workforce!) by simply sending periodic reminders: 

• Prior to the end of the year and before issuing W-2s to review their Form W-4

• At the end of Q4 for review and a chance to make any changes before the new year 

It’s easy for people to “set and forget” their W-4s, so remind them to update this information whenever they experience significant life changes (e.g., marital status, new child, income changes). Sending notifications gives your payroll team ample time to implement any desired changes to employees’ payroll withholdings.

Advise Employees to Monitor Pay Stubs

You can also encourage employees to check their pay stubs regularly to ensure accuracy, spot discrepancies early on, and inform you or your payroll provider if they find any issues. If an employee finds a payroll mistake, assist them by investigating and correcting it right away.

Avoid Unpleasant Payroll Errors

While employers are primarily responsible for withholding and remitting payroll taxes, employees play a crucial role in ensuring accurate withholding by providing accurate information and monitoring their pay stubs. And you can help your team avoid income tax headaches by providing guidelines and reminders! 

Are you ready to hand off the payroll process and ensure it’s handled accurately and timely? Book an intro call today to learn how we can help!