Mich. Admin. Code R. 206.21

Current through Vol. 24-19, November 1, 2024

Section R. 206.21 - Failure to withhold; withholding less than correct amount; liability of employer

Rule 21.

(1) If an employer erroneously fails to withhold Michigan income tax from compensation paid to an employee, or withholds less than the correct amount, he is liable for payment of the amount which should have been withheld, whether or not it is collected from the employee by the employer. The employer should correct the error within the same calendar year, if possible, by deducting the difference between the amount withheld and the amount required to be withheld from any compensation still owed the employee.

(2) If the failure to withhold is in a year other than the current year, the employer is still liable for the amount that should have been withheld and shall pay it to the department. Any reimbursement by the employee to the employer is a matter between the employer and the employee.

(3) If the employer fails to withhold the tax as required and, thereafter, the income tax against which the tax may be credited is paid, the tax required to be deducted and withheld shall not be collected from the employer. Such payment does not, however, operate to relieve the employer from liability for penalties and interest on the tax that should have been withheld.

(a) Example 1. An individual started a business on March 1 of the current year. He was an employer and the people on his payroll were employees subject to collection of federal income tax at source on wages under chapter 24 of the internal revenue code, 26 U.S.C. S4101 et seq. The employer did not register and start withholding Michigan income tax until August 1. The employer is liable for withholding the correct tax from the compensation he pays his employees. He should compute the tax he should have withheld from each employee from March 1 to August 1 and withhold this from each employee during the remainder of the year in addition to the correct tax that must be withheld from each payment of compensation. This is according to subrule (1) above.

(b) Example 2. An employer was withholding federal income tax from wages, but was not withholding Michigan income tax. The department made an audit in June, 1976, and determined the following:

Figure for 206.21

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The department assessed tax of $2,829.00 plus penalty and interest against the employer. Subsequently, the employer obtained signed employee wage statements from the employees and sent them to the department.

Employee no. 2 claimed he filed MI-1040 returns for the years 1973, 1974, and 1975. The department checked its records and found returns for all 3 years and that the employee did pay the tax on his own MI-1040. Since the assessment had not been paid, the department reduced the assessment by $1,164.00, which is the tax in the audit for the years, 1973, 1974, and 1975. If the assessment had been paid, the department would have issued a refund to the employer. This is according to subrule (3) above. Employee no. 1 also gave his employer signed employee wage statements claiming he filed MI-1040 returns and paid his own tax on the wages he received from the employer. The department checked its records and could not find a return for 1973. They found a joint return for 1974, but the adjusted gross income on the return was $12,000.00. This was compensation the wife received as a schoolteacher. It agreed with the compensation shown on the W-2 issued by the school district. The department also found a joint return for 1975 and the employee and his wife reported the compensation from both their employers. The department reduced the assessment against the employer by $450.00 for the tax included in the audit for 1975 since the employee paid the tax on this compensation on his own MI-1040. This is according to subrule (3) above. The department cannot give the employer relief for the tax he should have withheld from employee no. 1 in 1973 and 1974 since the employee did not report on any MI-1040 the compensation he received from the employer.

Employee no. 1 is delinquent for the year 1973 and filed a false MI-1040 for 1974. The department will give the employee credit as tax withheld of $328.00 in 1973 and $438.00 in 1974 at the time it confronts him about his individual income tax returns. The employer shall look to the employee if he wishes to get reimbursed for these 2 amounts. This is a matter between the employer and the employee. See subrule (2) above. The employer may recover the $449.00 tax he did not withhold in 1976 by deducting it from future compensation paid the employee during the remainder of the year according to subrule (1). The employees shall be given credit for these amounts on their 1976 W-2 plus any additional tax to be deducted for the remainder of 1976.

Mich. Admin. Code R. 206.21

1979 AC