Your HR Pro

It’s tax season, so employees may be coming to you with problems with their federal tax withholdings.

With the tax changes in the last year, employees might be surprised by their tax bills. What if an employee was marked as exempt from federal taxes, and they shouldn’t have been?

It happens all too often. Generally, the employee makes this error on their W4 form because they are mistakenly under the impression that they do not have to pay federal income taxes. When they file their taxes the following year, they are shocked that they owe taxes, and this leads to questions about why federal taxes weren’t withheld.  

What should you do if an employee has had no taxes withheld from their pay?

Here’s our recommended action plan:

1. Research. Let your employee know you will thoroughly research the issue and identify what happened. You must audit their payroll records, W4 forms, and any self-service payroll updates. Where was the election for exemption made? Was it the employee? The company? A software error?
2. Gather the facts. If the employee made the error on the W-4 form or through your self-service portal, prepare a copy of the documents or security logs that demonstrate where/when/who initiated this election. If the employee did it, then the responsibility is 100% on them to deal with the issue. The company is not obligated to reissue a W2 or do any other refiling. You were following the direction that your employee gave. If the error was the company’s, you’ve got some work to do. You’ll need to go back and refile their payroll with the correct deduction and reissue a W2. (Consult with your payroll provider to ensure you complete these steps correctly.) It can be tempting to mitigate harm to the employee, especially if the company is at fault. Bear in mind your company is prohibited from paying taxes on behalf of your employee. They are required to pay their own taxes. When your company goes to refile payroll, you must cover all the amounts due to the IRS. Then you must turn around and collect the employee portion from the employee. You may want to offer a payment plan to ease the employee’s burden in this regard.
3. Communicate. Once you’ve uncovered the issue and gathered your facts, develop a communication strategy. Meet with the employee to share your findings. There’s simply no way around that they will be very unhappy. It’s best to be clear and transparent with the employee about what happened.
4. Update their withholdings. Make sure to update their withholdings so the proper amount is withheld going forward. Don’t forget this step.
5. Audit. It’s also a good idea to audit your payroll records to ensure the proper deductions have been made for other employees. For all employees who were marked as exempt, double-check your paperwork. You may also want to consider sending a reminder to all employees at the beginning of the year to update their deductions as needed.

Dealing with a significant payroll issue like this can be stressful and frightening for a small business. Stay calm. Errors happen. Work to correct them and never repeat the same mistake.