An employer is responsible for withholding and remitting to the Internal Revenue Service (IRS) the amount of federal income tax that an employee needs to pay for their salary or wages. This is one of the three employment taxes that an employer needs to pay on behalf of their employees. The other two are federal Social Security tax and federal Medicare tax.
In addition to federal income tax, state and local income taxes may also need to be withheld from the wages or salary of an employee. An employer may withhold other amounts as well per agreement with an employee, e.g. contributions to a 401(k) or 403(b) account, withholdings for special types of insurance coverage that an employer may offer at a competitive price as a benefit of employment, such as disability or life insurance.
Who Is an Employer for Federal Income Tax Withholding Purposes?
For the purposes of federal income tax withholding, an employer is a person or entity with the following characteristics:
- The right to control and to direct the way their employees work, both as to the final work product and as to the details of when, where, and how the work should be done; and
- Controls the payment of taxable wages for services performed by the employee.
Facts that show the degree of control and independence fall into three categories:
- Behavior: If the company controls or has the right to control what the worker does as well as how the worker does their job, this suggests that the company is an employer;
- Financial: If the business aspects of the worker’s job are controlled by the entity that pays their wages or salary, this suggests that the worker is an employee. The aspects that are significant would include such things as how a worker is paid, whether expenses are reimbursed, who provides the tools and other supplies used in performance of the work, and the like;
- Type of Relationship: If there is a written contract of employment, this suggests that the worker is an employee. If the employee receives benefits, such as a pension plan, insurance, vacation pay and the like, this suggests that the worker is an employee. If the employment relationship continues over time and the work performed is a key aspect of the business, this would suggest that the worker is an employee and not an independent contractor.
Businesses must consider these factors when determining whether a worker is an employee or independent contractor. Some factors might suggest that a worker is an employee, while other factors might indicate that the worker is an independent contractor. There is no specified number of factors that result in a worker being classified as an employee or an independent contractor. There is no one factor that alone decides the issue. In addition, factors which are relevant in one case may not be relevant in another.
The main point is to look at the entire relationship and consider the extent of the employer’s right to direct and control the worker. An employer should consider the factors when establishing their relationship with a worker in order to get the desired result. In addition, the employer should document each of the factors it considers in arriving at the determination it ends up with.
Is a General Contractor an Employer of the Workers of a Subcontractor for Federal Income Tax Withholding Purposes?
Usually, a general contractor is not the employer of the employees of a subcontractor for federal income tax withholding purposes. The general contractor would not be viewed as the employer of the subcontractor’s workers if it does not actually control the payment of wages to them.
Factors that determine whether the general contractor has control over wage or salary payments include:
- Whether the general is responsible for setting up payroll;
- Whether the general is responsible for determining which employee gets paid; and
- Whether the general determines how much each employee gets paid.
Even if the general contractor is the person who supplies the funds to the subcontractor so that wages may be paid out, that is generally not enough to make the general contractor the employer for federal income tax withholding purposes. Thus, the subcontractor is responsible for making federal income tax withholdings and forwarding them to the IRS.
Is a Trustee or an Executor Liable for Federal Income Tax Withholding for Employees of a Trust or an Estate?
The answer to this question can be complicated. Generally, however, the trustee of a trust or the executor of a probate estate is responsible for making federal income tax withholdings for wages or salaries paid to employees of the trust or estate. The trustee of a trust and the executor of a probate estate must also withhold what their employees owe for Social Security withholdings and Medicare withholdings.
In addition, if a trust or an estate were to operate a business that is part of the assets of the trust or estate and pay salaries or wages to the employees of the business, then the trustee or the executor who manages the trust or the estate might be responsible for making federal income tax and other federal withholdings. While the tax withholding is actually paid out of the revenue of the business, it might be the trustee or executor who issues the paychecks and has to make the withholdings and forward the amounts withheld to the IRS. This would depend on the facts of the situation, however.
Are Nonprofits Exempt from Federal Income Tax Withholding?
Employers who are charitable or religious organizations, educational institutions, labor unions, and political organizations are all subject to federal income tax withholding rules. They must withhold taxes from the paychecks of their employees just as every other employer does.
How Much Withholding Is Required?
The withholding amount varies because it should depend on the total annual amount in salary or wages that an employee earns in a year. It also depends on the amount of income tax that a particular employee has to pay in a tax year given the amount of their salary or wages.
Ideally, the employer would withhold an amount that exactly matches the annual federal income tax liability of the employee. So, the employee would not owe any additional tax when it comes time to file their Form 1040; neither would the employee receive a refund because more was withheld than the employee needs to pay in taxes for the year. Achieving the ideal would be very unlikely, however.
Several factors help determine the proper withholding amount:
- The employer’s payroll period, whether it is weekly, bi-weekly or monthly;
- The method of withholding used;
- The number of exemptions and allowances the employee claims on their Form W-4; and
- Additional withholding agreements that the employer may have with the employee.
For example, if an employer offers their employees the option of contributing to a 401(k) plan, their contributions may affect their tax liability up to a certain limit. So, the employer’s withholding calculations need to take this into account.
Do I Need an Attorney to Help Me with My Tax Problems?
Tax laws are complex and subject to change. Although there are various tax preparation software programs on the market that may help you with your tax problems, they cannot provide the same individualized service that an experienced and knowledgeable tax attorney can.
If you are unsure about what your payroll taxes are or you need someone to represent you before the IRS, a tax attorney can help you.
