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Employers Must Withhold Payroll Taxes on Employment Related Judgments

The California Court of Appeal recently provided clarification and confirmation of a corporation’s responsibility to withhold payroll taxes on employment related settlements or judgments.  When an employee reaches a settlement or obtains a judgment against an employer for employment related lawsuits regarding the payment of wages, such as wrongful termination, retaliation, or even discrimination the amount of the settlement or judgment is considered “income”, and must be taxed appropriately.

The case in point related to a Costco employee who was awarded over $300,000 for wrongful termination.  Costco withheld more than $110,000 in payroll taxes, and the employee filed a lawsuit claiming that Costco had not met the full intent of the judgment.  The Court of Appeal has answered a question that has concerned California employers for years – whether or not to withhold taxes from payments of back pay or employment settlements.

The only previous case law from the Appellate Court seemed to state that an employer was not required to do so.  However, multiple decisions across the US in state and federal courts, as well as the 9th Circuit Court of Appeals have held that employers must withhold these taxes.  Failure to do so exposes the corporation to liabilities with the IRS and other state tax agencies.

Generally IRS tax code specifies that payroll related taxes (such as income tax and FICA) should be withheld from any payment made to employee in return for services provided.  The Supreme Court has extended this coverage to include the entire employer-employee relationship, not just work or services actually performed.

Corporate tax matters can be quite complex, and it is important to work with a tax, accounting and legal partner who not only understands the entire nature of your corporate and business operations, but can provide valuable strategic advice that increases visibility into every phase of corporate operations and transactions.  This is essential to ensure maximum profitability while decreasing the exposure to taxation and other liabilities.

Learn more about the single source capabilities of Allen Barron, and the contribution we can make to the success of your corporation or business enterprise.  We invite you to contact us for a complimentary and substantive consultation at 866-631-3470.