Can I Sue My Employer for Not Withholding Federal Taxes?

Discovering your employer has not been withholding federal taxes from your paycheck can be an alarming experience, raising questions about legal recourse. This situation places you in a difficult position regarding your employer’s compliance and your own standing with tax authorities. This guide provides a clear path for navigating an employer’s failure to withhold taxes, outlining the responsibilities of each party and the appropriate channels for resolution.

Employer and Employee Tax Responsibilities

The U.S. tax system for workers rests on shared responsibilities between employers and employees. Federal law mandates that employers deduct specific taxes from wages, including federal income tax determined by an employee’s Form W-4. Employers must also withhold Federal Insurance Contributions Act (FICA) taxes, which are a 6.2% Social Security tax and a 1.45% Medicare tax.

For every dollar of FICA tax withheld, the employer must contribute an equal amount to fund these programs. Failure to withhold and remit these taxes is a violation of federal tax law, and the Internal Revenue Service (IRS) can impose substantial penalties on the non-compliant employer.

Despite the employer’s clear legal duty, the ultimate responsibility for paying the correct amount of tax falls on the individual employee. Even if an employer fails to withhold funds, the IRS still expects you to report all your income and pay the taxes owed. This can result in a large, unexpected tax bill, underscoring the importance of addressing the issue promptly.

The Role of the IRS vs a Direct Lawsuit

When faced with an employer’s failure to withhold taxes, many employees consider legal action. However, the Internal Revenue Code does not grant employees a “private right of action,” which means you cannot sue your employer specifically for this reason. The authority to enforce tax laws and compel employers to remit payroll taxes rests exclusively with the IRS.

Your primary course of action is to report the employer’s non-compliance to the IRS. The agency is equipped with the authority to investigate the matter and take enforcement action, such as assessing back taxes and penalties against the employer. This shifts the burden of enforcement from you to the proper federal agency.

While a direct lawsuit over tax withholding is not viable, legal action might be appropriate in related circumstances. If the failure to withhold taxes is a symptom of a larger issue, such as being intentionally misclassified as an independent contractor, you may have grounds for a lawsuit under labor laws. Such a case would focus on the misclassification, with the tax issue being one component of the claim.

How to Report Your Employer to the IRS

Before you can formally report your employer, you must gather specific information to support your claim. A well-prepared submission is more likely to result in a timely and effective investigation by the IRS.

Reporting General Tax Violations

The primary document for reporting your employer for failure to withhold is IRS Form 3949-A, Information Referral. This is the official channel for alerting the IRS to suspected tax law violations. To complete it, you will need to provide the employer’s information, describe the violation, and explain how you became aware of it.

You should also gather your own records that substantiate your employment and the lack of withholding. This evidence includes:

• The business’s legal name, physical address, and Employer Identification Number (EIN)
• All pay stubs or wage statements you have received
• Bank statements showing direct deposits or canceled checks from your employer
• Any written correspondence with your employer regarding your pay or tax status

Once completed, you will mail Form 3949-A to the address provided in the form’s instructions.

Addressing Worker Misclassification

If you believe the root of the problem is that you have been misclassified as an independent contractor, you should also prepare to file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. This form asks the IRS to officially determine your work status. Completing it requires detailed information about the working relationship, including who provides instructions, who pays for business expenses, and whether there are contracts or benefits.

You should mail Form SS-8 separately to the specific address in its instructions; do not file it with your annual tax return.

After submitting these forms, it is important to have realistic expectations. The IRS will review the information but is prohibited by privacy laws from providing you with updates on the status or outcome of any investigation. You will not be notified of actions taken against your employer, though the agency may contact you if it requires additional information.

Fulfilling Your Personal Tax Obligations

Reporting your employer to the IRS addresses their non-compliance, but it does not resolve your personal tax liability. You are still legally required to report all income you earned and pay the associated taxes. When you file your annual tax return using Form 1040, you must include all wages from the employer, even though no taxes were withheld.

To address the uncollected Social Security and Medicare taxes, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages. This form is designed for situations where an employer did not withhold FICA taxes. On Form 8919, you will calculate your share of these taxes, and the total is then added to your overall tax liability on your Form 1040. Filing this form ensures you get credit for your earnings in the Social Security system.

Finally, you must account for the federal income tax that was not withheld. Since your paychecks did not include these deductions, you will be responsible for paying the entire amount owed when you file your return. If this has persisted for much of the tax year, you may face an underpayment penalty. To avoid this, you can make estimated tax payments directly to the IRS using Form 1040-ES.