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Collecting Prior Year's Fica not withheld from Employee

An internal audit just determine an employee who is subject to FICA was setup incorrectly in the payroll system. No FICA was withheld for 2015, 2016 and 2017. How far back can we go to try to collect the tax from the employee? We will contact the employee about the 2017 tax and request payment by April 15, 2018. Can we go back and request the tax for 2015 and 2016 or do all prior year's tax need to be collected by the April 15th date?
How we prepare amened Forms W2s/941x depends on your answer.

Your time, assistance and guidance is much appreciated.


  • Ouch -- What state (you might have some state wage deduction laws to deal with)? What's the total amount owed back? And are we talking an employee who can afford this? Or are you going to consider some type of repayment plan over time (and is 4 1/2 months enough time)? It looks like federally only FIT and Add'l Medicare have time limits. But honestly this is one I would run by a local tax accountant/wage law expert.

    According to IRS Pub 15 (Circular E), Employer’s Tax Guide: (Federal guidelines)

    "Collecting underwithheld taxes from employees.
    If you withheld no income, social security, or Medicare taxes or less than the correct amount from an employee's wages, you can make it up from later pay to that employee. But you are the one who owes the underpayment. Reimbursement is a matter for settlement between you and the employee. Underwithheld income tax and Additional Medicare Tax must be recovered from the employee on or before the last day of the calendar year.

    According to the IRS Tax Code:

    “The employer is liable for the employee tax with respect to all wages paid by him to each of his employees whether or not it is collected from the employee. If, for example, the employer deducts less than the correct amount of tax, or if he fails to deduct any part of the tax, he is nevertheless liable for the correct amount of the tax. Until collected from him the employee also is liable for the employee tax with respect to all the wages received by him.”

    I would immediately calculate and pay the amounts owed to the IRS (both ee and er portions) to stop any late payment penalties. Because in the end, the employer will be responsible for both parts even if the employee never repays anything (as will the employee).

  • Employee never inform of under withholding, but if their net pay changes down=ward by more than .000, oh boy, payroll hears about it!

    Personally, if the employee is still around, or is on reasonable terms, I would just ask them to agree to pay the amount back over some sort of time agreeable to both parties. If the employee does not agree (fired, if still employed in an at will position), then amend all items grossing up the amount not withheld, suck up the loss, and let the employee deal with their (now) reported income increase.

    (Sounds like a larger employer, not a small one where this amount makes a day to day difference, which is why I would go with the most expedient methods, not drag out some sort of forced payment if the employee wants to keeps shirking their liability. Could also be the employee really did not know they were not paying, which is a good sign the employee needs to be replaced. The payroll and payroll audit process should be cleaned up so this never happens again, and those who were responsible should have some consequences as well.)

  • There was a query which pulled employees in this scenario. For whatever reason this person was not on that audit query. He was caught while converting to a new payroll software. We will cover the tax due for 2017. We will work with the employee about paying back the 2017 liability. (approx: $6,200 - 2017 liab)

    My biggest question at this point is: "can we request the employee reimburse us for the 2015 & 2016 Tax Liability"? The regulations I have reviewed do not address time frames. (31.6205-1) They did address that settlement is between the employer and employee, as rrupert noted in their response.

    If we do not collect any of the funds (2015-2017) all earnings will be grossed up for paying the taxes on behalf of the employee.

    The process in the new software should prevent this happening in the future.

  • No idea, I am afraid.

  • Not an answer, but ideally someone runs audit checks in real time. FICA should be one of those checks. There are a number of FICA exceptions, both to people and to certain type of wages. The only exception I have really run into are certain visas. And these are a real problem because the visas with FICA exceptions tend to be time limited and SOMEONE needs to follow up on these prior to the visa expiring.

  • This should have been caught by payroll but it was missed. We do have many students on F1 visas and generally are caught. In my prior life this would have been an easy catch as we had a much simpler payroll population, I would do a comparison of FICA wages vs FWT wages. Here we pay pensioners, people on F1 visas, and have numerous earnings which are FICA exempt which makes the wage base comparison more difficult.
    I thank all for your input. Will add this to "lessons learned" and develop additional checks to catch these.

    Again, thanks and Happy New Year

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