It’s Tax Time! Or is it?
During tax season, companies may encounter new employees and even long-term employees who decide they don’t want to pay their federal or state taxes. They will complete a W-4 and say they are ‘Exempt’ from taxes or refuse to complete a valid W-4.
Is This Allowed? What Should an Employer Do?
Don’t panic, one reason may be they are (or turned into) a tax protester in the belief they are not required to pay taxes. There could be several reasons for this claim. It is helpful to understand their arguments so employers can better respond to their claims.
- Paying taxes is voluntary – The employee may believe IRS publications and even court cases state that ‘paying’ taxes is voluntary. The IRS has repeatedly clarified taxpayers may determine the correct tax when they file their returns but not that they can choose not to pay taxes at all. Section 1 of the IRS Code clearly states individuals must pay their taxes.
- The 16th Amendment was never ratified – The 16th Amendment gives the federal government the power to require taxes to be paid. When the employee makes this argument, it is based on a misunderstanding of how Amendments are ratified. The Constitution requires three-fourths of the states to ratify an amendment. The 16th Amendment was not ratified by all states but it was ratified by 42 of them which is above the three-fourths requirement. Many courts have concluded the 16th Amendment was properly ratified.
- Taxation is against my religious or moral beliefs – Some people believe in not paying taxes because they don’t agree with government actions and don’t want to endorse such actions. Some will add taxation violates their First Amendment rights. The First Amendment does not cover religious or moral beliefs as a reason for not paying taxes and the government does not recognize this as a valid reason for avoiding taxes.
The employee may bring up any of the above or even a totally different reason for thinking they are exempt from paying taxes. They may even refuse to provide a W-4 or provide one and tell you it contains false information because they do not want to pay taxes.
The best thing to do is not argue with them but focus on what your company is required to do.
If the employee refuses to provide a W-4 or completes it but with false information such as a fake social security number, the IRS provides guidance in Publication 15. The employer should not use the invalid W-4 to figure taxes. They should ask the employee to complete a valid form. If the employee does not and the employer has an earlier W-4, withhold as the company has done before. If the employer does not have an earlier W-4, the IRS instructs the company to withhold tax as if the employee had checked the box for Single or Married filing separately and made no other entries in the rest of the form. This means they will be taxed at the highest rate possible for their income bracket.
Another tactic employees may use is to provide other non-official documents including one called a Voluntary Withholding Agreement or a W-4T. This form claims the employer must not use the normal W-4 but stop withholding taxes. While it may look official, it is not a document recognized by the IRS and employers could be liable for penalties by relying on it. Be sure to closely review any documents an employee may submit when they refuse to use a W-4.
An employee may claim exemption from federal income tax if they did not owe any taxes last year and do not expect to owe taxes this year. This is rare and even then their wages are still subject to social security and Medicare taxes. If an employee is claiming exemption from taxes, they must give the employer a new W-4 by February 15th of each year. Employers can start withholding taxes at the beginning of the year as if the employee had checked the box for Single or Married filing separately until the employee submits the W-4. If the employee does not submit the W-4 by February 15th, the employer should continue the tax withholding at this rate.
Sometimes it may seem easier to not argue with the employee who refuses to give you a W-4, provides a false W-4 or other document and to not withhold the taxes. However, this is not a wise course of action as the employer is required to withhold income taxes and if they do not, employers and employees are subject to penalties equal to the unpaid taxes. The employer could also be subject to extra fines and imprisonment if they are found to have willfully failed to withhold the taxes.
How SDHRC Can Help
At SDHR Consulting, we understand dealing with false claims like those illustrated above can be overwhelming and stressful. When partnering with us, you can rest assured your company is following all required processes when it comes to taxes and much more. Correctly onboarding new employees can help ensure there won’t be troubles down the road which is why the services we offer including new hire paperwork, new hire orientation and HR Gap Analysis are so crucial.
About the Author
Traci Hagan, “Treasure Trove”
Traci is an HR Consultant who has been with SDHRC for over 2 years but has over 32 years of experience in employee relations, conflict resolution benefits administration, training and development, workers’ comp and staffing! Traci is also a Professor who enjoys traveling and spending time with her 16-year-old “puppy”.