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Withholding taxes from arbitration award lands employer in court

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in Small Business Tax Deduction Strategies

A federal trial court has directed an employer that appropriately withheld payroll taxes from an arbitration award to pay back the amount withheld to the employee. An employer must obey an arbitration award to the letter, the court ruled. (Barker v. Halliburton Company, No. H-07-2677, D.C. S.Texas, 2010)

Pay means pay

An employee that arbitrated her Title VII discrimination claims received $363,416 in back pay and $356,000 in front pay. After withholding $238,110, her employer paid her $481,306. She sued for the difference. Employer: Under tax code Section 7421, the court has no power to order the company to pay to someone else money directly owed to the government.

After reviewing all the reasons courts are allowed to reverse an arbitration award, the court ruled for the employee. Court: Arbitration awards can be reversed in only narrow circumstances, which don’t exist here. The arbitration award directed the employer to pay $719,416 to the employee, and so that is what it must do. No doubt the employee will be liable to the federal government for the taxes due on any part of the award that’s income, but that’s a matter between her and the IRS.

NO GOOD DEED GOES UNPUNISHED: The company was technically correct to withhold taxes, since the award was pay-related. It’s a safe bet that the company didn’t consult Payroll as it was reviewing the arbitrator’s proposed award. Too bad. It’s possible that the arbitrator would have been more precise regarding the allocation of taxes, if he or she had been asked.

Moral of the story: Similar tax problems can be avoided if Payroll stays in the loop during arbitration or litigation proceedings.

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