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popitch · Dec 4, 2008, 11:09 PM

On Dec 1st, I was notified by my employer that due to an error in reclassification of my immigration status in the payroll system when I transitioned from F-1 OPT to H-1B Visa, the appropriate FICA and Medicare taxes were not deducted from my paychecks in 2008. I was not aware of this error and, since (until recently) I had no idea about FICA and Medicare, I was sure that all appropriate taxes were deducted from me.

Now the employer wants to collect the debt owed from me before the end of the year. The employer wants to implement the following:

1. Company will pay to IRS the total debt owed. The amount paid by Company will be considered my additional earnings.
2. From my next six biweekly paychecks, 1/6 of the debt (per paycheck) will be deducted (that is approx. half of my net biweekly pay and, obviously, extends these deductions into the next year)

... and they are pressing me to sign a statement that I accept these terms ASAP.

At least from the way I am being treated, I feel like I need get an advice from a third-party tax professional before signing anything. However, I have no such opportunity at the moment as I am away on a business trip.

I've read IRS Publication 15 and understand that, in theory, underpaid FICA is employer's responsibility. But how is it in practice?

How should I proceed?
Thank you.

MukatA · Dec 5, 2008, 05:07 AM

Yes, it is employer's responsibility to collect FICA taxes, but you must pay your part of taxes when employer asks you to pay.

AtlantaTaxExpert · Dec 5, 2008, 11:00 AM

What your employer is doing is perfectly legal, and, in fact, they are being rather reasonable by pro-rating it over six pay periods. They COULD just confiscate your entire bi-weekly paycheck until the entire amount is paid.

Now, had they not discovered the error until after 31 January 2009, then (and only then) would they have no legal standing to collect the debt. But since the calendar year for which the FICA are due is not yet over, they are well within their legal rights to collect these back taxes.

popitch · Dec 5, 2008, 04:51 PM

Originally Posted by AtlantaTaxExpert

What your employer is doing is perfectly legal, and, in fact, they are being rather reasonable by pro-rating it over six pay periods. They COULD just confiscate your entire bi-weekly paycheck until the entire amount is paid.

Now, had they not discovered the error until after 31 January 2009, then (and only then) would they have no legal standing to collect the debt. But since the calendar year for which the FICA are due is not yet over, they are well within their legal rights to collect these back taxes.

Thank for your advice. I am sure it is legal. But is it ethical? And should I be given more options since it was the employer's error.

But I have two problems with the solution suggested by the employer:
1. "Company will pay to IRS the total debt owed. The amount paid by Company will be considered my additional earnings." I.e. I will have to pay federal and state income taxes on this amount although I am not actually getting this money. If the payroll mistake was done on the employer's part, why do I have to carry an additional burden to fix it?
2. IRS Publication 15 states:
"Collecting underwithheld taxes from employees. If you withheld no income, social security, or Medicare taxes or less than the correct amount from an employee’s wages, you can make it up from later pay to that employee. But you are the one who owes the underpayment. Reimbursement is a matter for settlement between you and the
Employee. Underwithheld income tax must be recovered from the employee on or before the last day of the calendar year."
What my employer wants to do is to artificially bump my paycheck so that the total debt can be collected in this year. Without this "bump", my remaining 2008 paychecks (even if fully confiscated) are not sufficient to repay the total debt. Does the employer have the right to continue such deductions in the next year?

Thanks again.

AtlantaTaxExpert · Dec 5, 2008, 05:00 PM

Absolutely it's ethical. You ARE liable for the employee share of the FICA taxes.

The employer made a mistake and is trying to rectify it, and, in my opinion, he is giving you rather generous terms in the process.

Now, if you REALLY feel that you are being mis-used, resign your position. That is, In my opinion, a bit extreme, but you seem to be rather upset about this.

popitch · Dec 5, 2008, 09:33 PM

I do not see what is generous about the terms under which I will end up paying several thousand dollars in income taxes on "additional earnings" that will never reach my bank account so that the employer fixes his books before the end of the year.

I understand that I did ask for an advice... but your advice to resign is way out of line. That is it.

IntlTax · Dec 6, 2008, 12:08 PM

You indicate that the Company will pay the IRS the amount owed and that it will be treated as additional earnings to you. If you have to pay it back to the company it should not be additional earnings to you. It is a loan that you will repay.

popitch · Dec 6, 2008, 12:47 PM

Originally Posted by IntlTax

You indicate that the Company will pay the IRS the amount owed and that it will be treated as additional earnings to you. If you have to pay it back to the company it should not be additional earnings to you. It is a loan that you will repay.

I also think it should not be additional earning to me. But here is a direct quote from the letter given me by the employer:
"The Company will pay the total amount owed $XXXX, plus the appropriate government transactional fees. The amount paid by the Company will be considered additional earnings to you for which you will receive a W-2 at year- end 2008. It is suggested that you seek accounting advice in order to file tax returns for 2008 and pay the appropriate taxes on the $XXXX plus the transactional fees"... and then I pay it back to the Company. Am I wrong assuming that under this terms I will have to pay income taxes on this amount + there is a possibility that I will be bumped into a higher tax bracket?

Thanks

IntlTax · Dec 7, 2008, 04:56 AM

As I said above, if you have to pay it back to the company it should not be additional earnings to you.

AtlantaTaxExpert · Dec 8, 2008, 11:21 AM

I agree with IntlTax; there is NO WAY that the company's payments to the IRS should be interpreted to be additional earnings to you. It seems to me that such an interpretation would violate Generally Accepted Accounting Principles.

I recommend that you go back to the employer and seek clarification on this issue. I suspect that the company is simply trying to pass through to you the fines that they must pay the IRS for late payment of these taxes.

If that, in fact, is the case, then, In my opinion, they are violating the law and the IRS would be interested in learning about it. However, you need to consider the consequences of such an action if you should inform the IRS of this violation by your employer.

popitch · Dec 8, 2008, 11:45 AM

Thank you AtlantaTaxExpert. I will request a clarification from the employer. Hopefully, it is just a misuse of words "additional earnings".

IntlTax · Dec 8, 2008, 11:59 AM

there is NO WAY that the company's payments to the IRS should be interpreted to be additional earnings to you

Of course, one way that the company's payments to the IRS would be additional earnings is if he doesn't have to pay it back. Therefore it is inaccurate to state that there is NO WAY that the company's payments to the IRS would be additional earnings.

AtlantaTaxExpert · Dec 8, 2008, 12:28 PM

Granted; if he never pays it back ("it" being his share of the FICA taxes), then it would be considered additional income.

But in the context of the whole posting, it is clear that the company intends to pay the back taxes owed, then collect the employee's share over six pay periods, which would extend into the next calendar year.

Hence, in that context, the payments by the company CANNOT be considered additional income.

The Texas Tax Expert · Dec 8, 2008, 07:34 PM

The portion of letter quoted in no way implies that you will be repaying the 'loan' and in fact it states that the company will pay the taxes and you will be considered as having additional income. It is normal that if someone pays your tax, you have income.

I agree with IntlTax that there is no income if you are definitely repaying it, but the documentation you quote does not seem consistent with you being required to repay it. Are you certain you are being required to repay the amount in question?

As an additional aside, I don't believe it has anything to do with GAAP because this is a tax issue, not a financial accounting issue.

popitch · Dec 8, 2008, 11:09 PM

Thanks everyone for your input. I sincerely appreciate it.

To dot the I's... Here is nearly the full text of the letter (everything what matters). The amounts are changed for simplicity (but everything is in proportion to the original). It is long and confusing... sorry

"Based on the chart above, the total amount due for 2008 is $6000. Effective with your paycheck of 11/13/2008, based on your current taxable income and IRS government regulations for current 2008 taxes, the appropriate FICA and Medicare taxes will be deducted from your paycheck. Please know that you will also be responsible for payment of the back taxes (January to date) in the amount of $6000. To satisfy this debt, we have arranged a payment schedule in which an additional $1000 will be deducted from your next (6) paychecks.

In order to facilitate in the correction of your payment of 2008 taxes, the Company has approved paying half of the taxable debt owed for those calendar years. The Company will pay the total amount owed $6000, plus the appropriate government transactional fees. The amount paid by the Company will be considered additional earnings to you for which you will receive a W-2 at year- end 2008. It is suggested that you seek accounting advice in order to file tax returns for 2008 and pay the appropriate taxes on the $6000 plus the transactional fees

Regarding the 2008 taxes owed, the Company has approved a special lump sum grossed up payment in the amount of $3000 to cover one half of the back taxes owed for 2008. This will be paid to you as a separate check. Please be advised that this grossed up amount will be considered taxable earnings for year-end 2008.

In order to alleviate the burden of a lump sum payment for the balance of $3000 the Company has agreed to allow you up to one (1) year to pay in full but no later than December 1, 2009."

Should I accept this terms as is? Or do they indeed imply that I will have to pay income taxes on "loan" money? If they do, how should I respond?

Thanks!

AtlantaTaxExpert · Dec 9, 2008, 09:49 AM

This is getting overly complicated, and it is NOT necessary.

Take your annual gross income for 2008.

Multiply it by 7.65%.

The result is what you should have paid for FICA taxes.

Subtract what has already been and will be collected starting with your 11/13/2008 paycheck.

The difference is the amount that should be collected from your paycheck to pay the back FICA taxes, and it will NOT be a round $6,000.

And what is being collected is NOT additional income to you and should NOT be taxed as such.

Go to the payroll department and have them explain exactly WHY they think the late tax payments should be considered additional income. If you are NOT satisfied with their answer, or you do not feel comfortable with dealing with payroll, contact a local tax professional with experience in filing these type of employment taxes and ask him to accompany you to the meeting as YOUR advocate. That way, the payroll employee cannot deceive you into believing that you owe taxes on this money, which, In my opinion, you do not owe!

IntlTax · Dec 9, 2008, 10:06 AM

Popitch, you should seek the advice of a tax professional. The language of the letter is confusing. The letter mentions a chart (that was not included here) which could help in understanding what is being proposed.

largoaleman · Feb 3, 2009, 08:46 AM

Originally Posted by AtlantaTaxExpert

What your employer is doing is perfectly legal, and, in fact, they are being rather reasonable by pro-rating it over six pay periods. They COULD just confiscate your entire bi-weekly paycheck until the entire amount is paid.

Now, had they not discovered the error until after 31 January 2009, then (and only then) would they have no legal standing to collect the debt. But since the calendar year for which the FICA are due is not yet over, they are well within their legal rights to collect these back taxes.

Hi, I'm in a similar situation, but my employer only discovered this mistake in December of '08 and I haven't been paying FICA since Feb'07. Trying to understand what the comment above means with regards to the Jan 31 deadline. Sounds like I'm responsible for my '08 back taxes, but the '07 ones?

AtlantaTaxExpert · Feb 6, 2009, 12:28 PM

In my opinion, the company has no legal standing to collect back FICA taxes for 2007. They lose that right once the date goes past 31 January 2008.

Now, if you AGREE to make the back payments, the IRS will not make the company give you the money back.

Further, if you choose to FIGHT the company's assessment of the 2007 taxes, they probably will find a reason to terminate you from your current work position, so you have to decide if this is worth losing your job over.

largoaleman · Feb 6, 2009, 12:36 PM

Originally Posted by AtlantaTaxExpert

IMHO, the company has no legal standing to collect back FICA taxes for 2007. They lose that right once the date goes past 31 January 2008.

Now, if you AGREE to make the back payments, the IRS will not make the company give you the money back.

Further, if you choose to FIGHT the company;s assessment of the 2007 taxes, they probably will find a reason to terminate you from your current work position, so you have to decide if this is worth losing your job over.

OK, thanks. Very helpful. Saves me about 3,500 bucks... ;-)

I'm not concerned about getting terminated, especially since my talks with HR already sounded like they see their own mistake in the whole issue. So will let them know that '07 is definitely on them.

Thanks, again. If this goes through as hoped, I'll make sure to drop you a tip.