What is the Employer’s Payment Liability on an Incorrect Form W-4?

When an employee fills our their W-4 incorrectly, who’s on the hook - the employee or employer? Find out how to handle this situation, as well as ways to avoid the problem in the first place.

Every employee has to fill out a W-4 upon being hired, but what happens if the employer makes a mistake when transferring the number of withholding allowances from the employee’s Form W-4 to the employer’s payroll system? The employee might end up having too little income tax withheld and would owe money to the government. 

But who would be liable for the amount not withheld - the employer or the employee?

The answer is not an easy one. It is possible that both the employer and the employee may be held responsible for the amount under-withheld.  In this situation, the employer made the mistake; however, the employee is held liable for 100% of the tax due on Form 1040. The employee only receives credit for the amount that was actually withheld by the employer, which was incorrect, and there is no credit given for any amount that should have been withheld but was not. So - what happens next?

What Can You Do When W-4 Errors Are Found? 

There is a process where employers can work with the IRS to determine if the amounts underwithheld were reported by the employee on Form 1040 and whether they were paid. The employer can fill out Form 4670 Request for Relief from Payment of Income Tax Withholding, and the employee can fill out Form 4669 Statement of Payments Received and submit to the employer. The employer submits both to the IRS, and the liability is cleared.

If such an error is recognized during the course of a tax year, it should be corrected during the year. The easiest way to rectify a situation like this would be to explain what has happened to the employee and to increase the per period tax withholding for the remainder of the year so that the employee is made whole by year end.

Complications in 2018

New tax formulas introduced by the Tax Cuts and Jobs Act may complicate withholdings in tax year 2018. The IRS anticipates that a large percentage of taxpayers will be underwithheld because most W4s were not adjusted to account for the new federal tax calculation methods. In fact, in February 2019 the IRS announced that it will waive estimated tax penalties for some tax payers whose 2018 federal taxes have been underwithheld - specifically in cases where a taxpayer met at least 85% of his/her liability, where the previous limit was 90%.

Check out the IRS website for more information on the employer-employee liability for W4 information.  

Optimum’s Human Resource software allows you to easily process W-4s and other employee documents. View a free demo to learn more today!

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