The aftermath of the Great Recession may very well be read in an increase in the number of tax levies on wages, as employees scrimped on their taxes to pay for other things. The IRS isn’t sympathetic, and that’s bad news for you. Tax levies, with their different withholding and remittance rules and paperwork requirements are an inconvenience for already overworked Payroll departments.
Employees who have shorted the IRS may not be too happy about having to pony up on the back end through tax levies. A couple of recent cases reaffirm that you aren’t liable for withholding under a tax levy.
A federal appellate court ruled that an employer wasn’t liable to an employee for honoring a tax levy. Among the employee’s more colorful allegations against his employer were that it breached its fiduciary duty, committed fraud and negligence, intentionally inflicted emotional distress and tortuously interfered with contract and business relationships. (Hughes v. Chevron Phillips Chemical Company LP, No. 11-10698, 5th Cir., 2012)
A federal trial court dismissed an employee’s lawsuit seeking $445,000 in damages from his employer for honoring a tax levy. Employee’s allegations: He never agreed to withholding under the levy, and, by withholding, the employer breached its at-will contract with him; the cash damages were to compensate him for lost wages, lost investments, loss of the ability to pay normal bills and mental anguish associated with those losses. (Al-Sharif v. Epes Transport System, Inc., No. 1:11-cv-00037, D.C. S. Ga., 2012)
PAYROLL PRACTICE TIP: As these cases show, employees (and their lawyers) can be pretty creative. Regardless of the frivolous nature of these lawsuits, the company and individual employees will still be forced to hire attorneys and go to court to have such cases dismissed. Advice: Consider adopting a policy under which employees will be terminated for bringing frivolous lawsuits.
How tax levies work
The IRS will send you Form 668-W, which contains instructions for you and the employee. It also provides levy tables, which are inflation-adjusted every year, from which you figure the employee’s take-home pay.
Tax levies take priority over all other garnishments. Exceptions: If the employee’s wages are also subject to a state tax levy or an order for child support withholding, and those levies were served first, they are honored first. If all levies are served simultaneously, the federal levy is honored first.
To implement a levy, take these steps.
Figure the employee’s regular income tax withholding, plus pre-levy voluntary deductions. Watch it: New deductions, or an increase in existing deductions, usually aren’t allowed. What’s OK: increases in 401(k) deductions that are based on salary increases. What’s not OK: increases to repay a company loan (the original deduction to repay the loan is OK).
To arrive at the employee’s take-home pay, use the 2013 tables for levies beginning this year. The difference between the amount left after regular withholding and the exempt amount, as shown in the levy tables, is the amount you send to the IRS to satisfy the levy. If you’re honoring a levy from a prior year, continue using the tables that were in effect for that year, unless the employee changes the number of exemptions or updates his/her parts of Form 668-W for 2013. In that case, use the 2013 tables to recalculate the exempt amount. The IRS publishes these tables in Pub. 1494, which is available on the IRS’ website.
You can send one check to the IRS for multiple tax levies, but you must separately list the details of each employee’s levy. Include a phone number that the IRS can use if it has questions.
Take it. It’s yours
An employee who chooses not to incur the wrath of the IRS and the Payroll department can stave off a levy by entering into a voluntary withholding agreement with the IRS. Of course, any voluntary agreement to withhold back taxes requires the employer’s consent. If you agree, you and the employee complete and file Form 2159 with the IRS.
FYI: As with levies, withholding is separate from regular income tax withholding. Once withholding begins, it continues until the IRS provides a release.
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