Does Income Tax Held by Employers Cover Tax Liability?

Employers can take your money -- but they cannot keep it. The employer withholds income tax estimates as well as FICA or Social Security and Medicare contributions from your paycheck. Your employer may also withhold health insurance premiums. All withheld amounts are payments on your behalf, deposited by the employer to the appropriate account. The Internal Revenue Service is the collector of federal income taxes, Social Security and Medicare deposits, but the funds are separate.

Function

• When you complete a W-4 form at your place of employment, you authorize the employer to take funds from your paycheck to cover your income taxes in advance. The employer deposits these funds monthly or quarterly, using your Social Security number for proper crediting of your account. At the end of the year, your employer calculates the totals and provides you with a W-2 form indicating the amounts withheld and paid on your behalf for the past year.

Time Frame

• Federal income taxes are due by April 15 of the year following the tax liability. The figures your employer provides on the W-2 form are calculations through the end of the past year. All taxes withheld after January 1 apply to a new year and are not available to cover your tax liability for the previous year.

Effects

• The Form 1040 is a reconciliation form. It reconciles the taxes you paid for last year with the taxes you owe for last year. With luck, the figures will be about the same. You may owe income taxes for last year and this tax is due when you file your Form 1040 tax return.

Significance

• The employer is required to submit forms and make deposits timely and accurately. Penalties for employers are serious and cumulative. Most employers are honest and meticulous with calculations and withholding, but if your employer is not making deposits on behalf of employees, the IRS will notice.

Misconceptions

• The IRS grants an automatic extension for filing income taxes in April. You can file Form 4868 and receive an extension for up to six months. This is not an extension to pay your taxes owed. If you owe federal income taxes from the previous year, pay with the filing of the extension request.

Solution

• If you owe income taxes when you file your Form 1040, file a new W-4 with your employer to increase your withholding for next year. You may need to claim one fewer dependent or add an amount to be withheld on Line 6. The new withholding amounts should start immediately to provide you with more accurate calculations for the next year.