Does an employer's failure to withhold Virginia income tax relieve the employee from paying tax on the wages?

Subject

Taxpayer never paid Virginia income tax on any of the income he received from the employer.

Plain-English summary

A worker's employer treated him as an independent contractor and did not withhold Virginia income tax. An IRS audit apparently concluded that the employer should have treated him as an employee. The worker argued that the employer's failure to withhold should correct the Virginia assessment.

Virginia disagreed. An employer's withholding failure does not reduce the employee's obligation to report income and pay the full tax. If tax was not being withheld, the worker should have made sufficient quarterly estimated payments under Va. Code § 58.1-490 et seq. Because he paid no Virginia tax on the income, the assessment was upheld and an updated bill with accrued interest was to be issued.

What this means for you

Worker-classification and withholding failures can create obligations for the employer, but they do not erase the worker's own income-tax liability. Employees who discover that withholding is missing may need estimated payments to avoid an unpaid balance.

Citations and references

• Va. Code §§ 58.1-461 et seq. and 58.1-490 et seq.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-23

Original ruling text

March 15, 2017

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the “Taxpayer”) for the taxable year ended December 31, 2009.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file a Virginia individual income tax return for the 2009 taxable year. A review of the Department's records showed that the Taxpayer had not filed a return. The Department requested additional information from the Taxpayer to determine if his income was subject to Virginia individual income tax. In response, the Taxpayer filed a return that reported a tax due. Because the Taxpayer had not paid the tax, the Department issued an assessment. The Taxpayer filed an appeal, contending that his employer erroneously treated him as an independent contractor and did not withhold income tax from his wages.

DETERMINATION

In John M. and Alice D. Church v. Commissioner of the Internal Revenue Service , 810 F2d 1959, A.F.T.R.2d 87-469 (2nd Cir., 1987), the United States Court of Appeals held that “the failure of the employer to withhold taxes, as it should have, did not lessen the taxpayers' obligation to report and pay taxes on income that they in fact received.” Thus, while an employer may have been required to withhold Virginia income tax from an employee's compensation under Va. Code § 58.1-461 et seq. , the employee is responsible for reporting the income and paying the entire tax. See Public Document (P.D.) 95-119 (5/16/1995).

In this case, it appears that the IRS conducted an audit and determined that the Taxpayer's employer should have treated him as an employee rather than an independent contractor. The Taxpayer does not disagree with that conclusion, but he asserts that his employer should have withheld income tax from his wages. As stated above, regardless of whether the employer withheld wages or not, it is the employee's responsibility to report the income and pay the entire tax. If the employer was not withholding wages, the Taxpayer should have declared and paid sufficient quarterly estimated tax payments, as provided in Va. Code § 58.1-490 et seq. , to cover the anticipated tax liability. In this case, the Taxpayer never paid Virginia income tax on any of the income he received from the employer. Therefore, I find that the Department's assessment is correct.

An updated bill will be issued, which will include accrued interest to date. The Taxpayer should remit payment within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1085.M