Does a company or an employee have to pay income tax?

Question

Here is a hypothetical situation:

1. A person worked in company A for first 9 months in a year. They paid income tax for him.
2. The remaining 3 months he worked in company B. This company assumed that the person didn't have any income before he joined them, and didn't pay any income tax for him (because his income in company B didn't reach the threshold of taxable income).

Now company B claims that the person has to pay this tax himself because it's his responsibility. As I know in many countries companies are obliged to withhold and pay income tax on employees' behalf. So it's company's responsibility to pay the tax. Who has to pay the tax in this situation? In case no one pays the tax will Revenue Department inquire this tax from the person or from the company? Assume the USA Law.

Answer 1

So these are the basic rules of the tax game:

1. The taxpayer (employee, in this case) is liable for tax on income earned by him.

2. On occasion, the payor of the income to be received by the taxpayer is required to withhold tax on the payment, remit the withheld tax to the IRS/state/local tax authority and pay the balance over to the taxpayer. If that happens, the taxpayer is entitled to a credit against his taxes for the amount withheld by the payor.

3. Failure by the payor to withhold the required amount of tax does NOT excuse the taxpayer from paying tax on the income he earned.

So company B is right.

Answer 2

Who has to pay the tax in this situation?

The person who earned the income.

The employer's role is limited to withholding the portion of income and pay it --on the employee's behalf-- to the tax authority(-ies) in accordance to the employer's best information at the time of computing the payroll. The inaccuracy may go either way. Sometimes the employer's information is inaccurate whereby an excessive amount is withheld, in which case the (state and/or federal) tax authority subsequently reimburses the employee.

Regardless of whether or not the employer's best information was accurate, the employee (or whoever prepares the tax forms for him) should identify whether he shall disburse or be reimbursed when preparing his tax filings.

Answer 3

Any decently organized business will require the new employee to complete IRS Form W-4 on the first day of work. The employee can blindly take the fields on the form at at face value and hope an appropriate amount is withheld. But a wise employee will estimate the tax for the year using all the information available to the employee and increase the number of allowances so that the amount of tax owed or to be refunded is small. If no extra allowances are claimed and the amount of tax that will be owed at the end of the year is excessive, there is a space to have the employer withhold additional tax.

If there is a state income tax the employee may have an opportunity to fill out a different withholding form for the state, if the allowances claimed on the federal form don't result in a low amount of tax owed or to be refunded.

Answer 4

In the US, the worker is responsible for the taxes whether or not the employer did, did not or should have withheld them.

The law is different in Australia. If your employer withheld but didn't remit, the ATO will pursue them for the debt. If an employer was required to withhold and didn't, then they (and you) will be assessed (and pursued) as if what you received was your net salary - in effect you just got a massive pay rise. Penalties apply to the employer in either case.

Answer 5

It's one thing if you and the company agreed on a salary and the company paid you the complete salary, with no deductions. In that case the employee would be responsible.

It is a completely different matter if the company deducted the tax, but didn't send it to the tax office but kept it. Employee is still responsible for the tax, but the company in most countries (including I believe UK, USA and Germany) is guilty of something slightly worse than theft, which will lead to criminal charges against the people responsible, and which a limited company doesn't protect you against. In Germany, the inland revenue will start proceedings to dissolve the company if employees' taxes are not paid.