Employee Shouldering Cost of Payroll Mistake?
March 25, 2011 6:17 PM   Subscribe

A friend's employer's payroll company has been incorrectly filing her payroll taxes by subtracting her healthcare costs after taxes, causing her to pay more income tax than necessary. Her boss has said she is out of luck, is there anything she can do?

Her employer's payroll company was subtracting healthcare costs after taxes rather than before, so she has been paying taxes on income intended to go towards her healthcare plan. Upon realizing this her boss immediately dropped the payroll company and is looking for a new one. Since the payroll company didn't have the correct information in place to make this deduction, they can't go back to correct the error. The accountant for the business didn't catch this omission until the same accountant saw my friend's W-2 - even though the accountant had been filing quarterlies for the business. . My friend's boss has said my friend has no way of recouping the losses caused by the incorrectly file payroll taxes.

Is this true? Should her employer be responsible for the lost income? Should the payroll company be responsible?

It's a very small business (<10 employees) in NY state and my friend is the only employee impacted by this as she is the only employee with health insurance.
posted by anonymous to Work & Money (14 answers total) 1 user marked this as a favorite
Lawyer up. This is absolutely not for someone without extensive experience in tax law.
posted by Madamina at 6:21 PM on March 25, 2011

when you say payroll, do you mean the employee or employer portion ?

If we're just talking the employee, yes, she's still on the hook. Just like if you mis-calculate your w4, and not enough is taken out, you're still on the hook ...
posted by k5.user at 6:22 PM on March 25, 2011

Should her employer be responsible for the lost income?

Wait, if I'm reading this right, the "lost income" is actually "overpaid taxes," isn't it? So can't she just put that on her tax return and be entitled to a refund of the relevant amount? I mean, talk to an accountant since I doubt there's a box for that on the 1040 EZ, but there might not be a reason to flip out about this...
posted by rkent at 6:26 PM on March 25, 2011 [4 favorites]

Since someone is claiming lawyer, I'd counter with the horses mouth:

IRS has clear guidance on this issue.

In short, she'll get the money back when she files her taxes, or potentially from her employer:
Repaying Withheld Tax. If you find you are having too much tax withheld because you did not claim all the withholding allowances to which you are entitled, you should give your employer a new Form W–4. Your employer cannot repay any of the tax previously withheld.

However, if your employer has withheld more than the correct amount of tax for the Form W–4 you have in effect, you do not have to fill out a new Form W–4 to have your withholding lowered to the correct amount. Your employer can repay the amount that was incorrectly withheld. If you are not repaid, your Form W–2 will reflect the full amount actually withheld.
posted by k5.user at 6:28 PM on March 25, 2011 [2 favorites]

Right, is the problem that the W-2 itself is incorrect (classifies non-taxable income as taxable) or that the withholdings were too high? Excessive withholdings aren't really a big deal.
There is a procedure for dealing with incorrect W-2s if the employer refuses to fix them, although your friend might not want to go through it as it could get the employer in trouble with the IRS.
posted by phoenixy at 6:32 PM on March 25, 2011 [1 favorite]

I would request a W2-C for last year, with the cost of healthcare correctly reflected as non-taxable income and the taxes reflected as they were paid. This will mean that any taxes in the non-taxable health care will show correctly as an overpayment. Then file an amended tax return.

For this year, I would request a correction so that next year's taxes will also be correct.
posted by Zophi at 6:35 PM on March 25, 2011

If she's just been overpaying her taxes, she'll get the money back when she fills out her tax returns for last year.

That's what a tax refund is. It's the money you overpaid to the government.
posted by Netzapper at 6:44 PM on March 25, 2011

this exact thing happened to me. my employer did have recompense the incorrect FICA withholdings directly, but the overage on the income tax i couldn't get back until i filed for my return. i didn't lose any money over this in the end.
posted by Tandem Affinity at 8:29 PM on March 25, 2011

As other's have mentioned. Your friend has overpaid, they will get paid back come tax time.

I'd say try to get it back from the employer, but just from knowing the rough amounts involved I'm not sure this is very large amount of money?
posted by bitdamaged at 8:34 PM on March 25, 2011

I'd say try to get it back from the employer

Odds are good that the employer has already submitted the taxes withheld to the government which means that they don't even have it to give back. The government will give it back at tax time.
posted by scrute at 9:11 PM on March 25, 2011

There's likely an overpayment of two different taxes involved here:

1) Income tax. She'll reconcile this when she files her tax return and get the excessive withholdings back in her refund. Just make sure she gets a W-2 or W-2C with the correct amount of gross wages, i.e. not including the health plan. (If that's problematic, see the link that phoenixy posted.)

2) FICA/payroll tax. This is a fixed 7.65% deducted from the gross of every paycheck. I'm not entirely sure, but it looks like IRS Form 843 is the proper way to request a refund of overpayment, if the employer refuses to repay it.
posted by Sxyzzx at 11:05 PM on March 25, 2011

Madamina: "Lawyer up. This is absolutely not for someone without extensive experience in tax law"

This is a simple and not uncommon mistake that can be addressed by anyone who can read and advocate on their own behalf. This is a tax return issue.
posted by JohnnyGunn at 11:19 PM on March 25, 2011 [4 favorites]

Okay, okay -- I agree with everyone else (with more experience!) that this seems like a pretty clear tax issue.

My worry, though, is that especially with a small business in which you're the only insured employee, you want to make sure your ass is covered. Everybody has good intentions, but you never know. (And THAT is where my experience is. Le sigh.)
posted by Madamina at 11:04 AM on March 26, 2011

I had the opposite problem. My company took my employer's contribution to my partner's insurance out pre-tax. You can bet that Uncle Sam wanted the money from me, regardless of whose mistake it was. I hope they refund your money as cheerfully as they collected mine!
posted by kamikazegopher at 5:40 PM on March 27, 2011

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