Q: What’s the employer’s liability if, due to a mistake in entering the number of withholding allowances from an employee’s W-4 form into the payroll system, less than the requested amount was withheld?
A: Both the employer and the employee are liable. The employee gets a credit on the 1040 for the amount of income taxes withheld, not what should have been withheld. The employer won’t be liable for the underwithheld taxes if the employer proves that the taxes were paid by the employee. But the employer remains liable for penalties related to the underwithholding.