Q: If an employer underwithheld income taxes by not using an employee’s W-4 form properly, and the employee is assessed interest and penalties when he files his 1040, can he hold the employer responsible for the interest and penalties, or even the underwithholding? What is the employer’s liability to the IRS for the underwithheld taxes?
A: The employee wouldn’t be assessed interest, but he could be liable for estimated tax penalties.
The good news is that the tax code doesn’t allow employees to sue their employers for withholding mistakes. The bad news is that the employer is liable for the taxes that should have been withheld. You won’t be liable if the employee provides you with a statement that the taxes were paid; but you will still be liable for penalties and interest.