What happens if my employer doesn't pay my payroll taxes?

May, 16 2025 by Jean Lee Scherkey, EA

Some folks, including our furry friends, absolutely revel in surprises. Max, my family’s dog, loved a good surprise, especially if it meant scooting his snout around the house to find the treats we hid. While we stashed his treats in the nooks and crannies around the house, Max would stay in the kitchen, his rump shimming with glee and head turned to the wall to not ruin the surprise. As much as Max loved these surprises, he certainly didn’t bask in the ones he disliked, like when a wily coyote used our backyard as a thoroughfare at night.

Whether canine or human, no one relishes a bad surprise, especially when it impacts our financial bottom line. Finding out your employer didn’t pay your payroll taxes checks the box for being a bad surprise – it can wreak havoc on your peace of mind, has the potential to drain your pocketbook, and is more akin to a taunting trick than a tasty treat. Instead of imagining your refund topping off your vacation fund, you picture yourself on hold with the IRS, trying to establish a payment plan for the tax you didn’t anticipate owing. Unfortunately, taxpayers can reel from this surprise each year and are unsure of its tax impact. So, who is on the hook for the unpaid taxes – the employee, the employer, or some strange concoction of both?
 

My employer withheld payroll taxes but didn’t remit the taxes to the IRS.

What happens if an employer withholds federal income, Social Security, and Medicare taxes on behalf of the employee but does not report and remit (deposit) the taxes to the IRS? How would a worker even know this happened? Unfortunately, employees can discover, in a couple of unpleasant ways, that their employer may not have reported or deposited the income, Social Security, and Medicare taxes withheld from their wages. And it happens more often than you might think.
 

I did not receive a Form W-2, or I received an incorrect Form W-2.

One of the first ways an employee may discover something has gone awry is when they do not receive a Form W-2 from their employer, despite many attempts to obtain it. Often, this can happen with a former employer, especially if the employer was experiencing financial hardship or worse, went out of business. In these circumstances, employers may not have filed their payroll returns. Worse yet, they may not have deposited their employees’ withholdings. If this happens, the employee must still report their wages and the withholding taken from their earnings on their income tax return. You can file an extension instead of filing your tax return by the original due date, which is usually April 15. Keep in mind that filing an extension gives you additional time to file your return, but not to pay any taxes that are owed. If you anticipate you may owe tax, you may want to make a tax payment with your extension. This will save you some interest for paying late. Usually, by June/July, the IRS uploads a taxpayer’s income statements, such as W-2s and Forms 1099, and reportable expense statements, such as mortgage interest paid, onto their account. At this time, you will be able to see if the employer submitted a copy of your W-2 to the IRS. If they did, you can take this information and complete the preparation of your return. Taxpayers may access their income statements and various transcripts either through their  Individual Online Account or by submitting Form 4506-T, Request for Transcript of Tax Return, by mail. For more information about accessing your tax records and transcriptions can be found on the IRS’s “Get your tax records and transcripts” webpage.

What if your employer didn’t submit Form W-2 to the IRS? All is not lost if you keep a copy of your paystubs. You can use the information listed on your final paystub of the year to prepare Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Form 4852 reports to the IRS the wages a taxpayer received from their employer and the taxes that were withheld. Form 4852 can also be used when an employer issues an incorrect Form W-2 and does not file a corrected W-2.
 

I received an IRS Notice CP05A, CP05B, or Notice CP2000.

Another way an employee may discover their employer did not report or remit the payroll taxes withheld from their wages is when they receive IRS Notice CP05A, We’re holding your refund until we finish reviewing your return, or Notice CP05B, We need more information to determine if you’re due a refund. One of the reasons the IRS may need additional time is that they need to verify the withholding amounts reported on your return. It is vital to read the notice you receive carefully, as the IRS may request you submit documentation to verify the withholding you reported on your return, especially if the amount differs from what was reported (or not reported) to the IRS. In addition to IRS Notices CP05A and CP05B, a taxpayer may receive a Notice CP2000. Taxpayers who may not anticipate a refund but have a discrepancy between the amount of federal income tax withholding reported on their submitted return and the IRS’s records may receive a Notice CP2000, Proposed Changes to Your Tax Return. In the notice, the IRS will request additional information to resolve the discrepancy between what you and your employer reported to the IRS.

Whether or not your employer failed to prepare or issue you a Form W-2, submit quarterly payroll returns, or deposit payroll taxes, the fact remains that federal income, Social Security, and Medicare taxes were withheld from your wages. Your pay statements (paystubs) show the gross wages you earned, the taxes withheld, and the net wages directly deposited into your checking account. Because it appears your employer did not report or remit the taxes withheld to the IRS, does this mean you are on the hook to pay the tax again? Thankfully, the answer is a resounding no. The law states that if the employer already withheld the taxes on behalf of the employee, the employee still receives credit for the taxes withheld. This is true even if the taxes were never remitted to the IRS by the employer. However, the employee will need to provide documentation that verifies the taxes that were withheld from the employee’s gross wages by the employer. This is why you must retain your paystubs, especially the final paystub you receive from your employer for the year.

Many employees receive their paystubs electronically, which has its advantages and drawbacks. One of the benefits is that electronic paystubs are easy to save to a secure file that can be easily accessed. However, because the paystubs are electronic, employees make the mistake of not reviewing their paystubs or saving a digital copy onto their personal devices. Making a habit of reviewing your paystub every payday can alert you to possible errors quickly. It would be terrible to realize in January of the following year, when you receive your W-2, that no federal or state income tax was withheld during the prior year.

Generally, the IRS will request you to provide at least three pay statements or paystubs, including the final paystub you received for the year. Ideally, you should have a copy of all your paystubs for the year, as the IRS may request to see all of them. The pay statements must show the dates the wages were earned, the gross income received, taxes withheld, and net wages paid. Even if the employer prepared and submitted an accurate Form W-2, providing the W-2 alone will not be sufficient to verify that the taxes were withheld. As an alternative to paystubs, the IRS may also accept as verification a letter from your employer, on the company letterhead, that indicates the dates you were employed for the year, the wages paid, and a breakdown of the withholding deducted from your wages.

Employers are required to provide employees with a pay statement whenever they are paid. The paystub can be provided digitally. If you are not receiving a paystub when paid, you will want to speak with your employer about receiving these records. If the employee cannot verify the taxes were withheld from their wages, or their employer did not withhold their share of Social Security and Medicare taxes and federal income tax, the employee will be required to pay the taxes. This is because paying these taxes is ultimately the responsibility of the employee. While you may be required to pay your portion of Social Security, Medicare, and income taxes, you are not required to pay the employer’s portion of Social Security and Medicare taxes. And your employer does not get off scot-free for failing to withhold your portion of payroll taxes. The employer will be on the hook for significant penalties. For more on the tax consequences that can befall an employer when they owe back payroll taxes, click the following link: “Help! My business owes back payroll taxes to the IRS!”

While most folks will punch a timecard at some point, many may not know how their net pay is calculated. They just know the amount never feels like it’s quite enough to make ends meet. For those looking for a little primer on how the sausage is made (how you go from a gross wage amount to your net pay), keep reading.
 

What are payroll taxes, and when are they required?

Payroll taxes, also known as employment taxes, consist of federal and, when applicable, state and local taxes that are legally imposed on wages. Employers must collect and remit payroll taxes to the IRS or state tax agency. The taxes are based on the wages paid by an employer to an employee for the services the employee rendered. Whether an employer-employee relationship exists between workers and their bosses will depend on the degree of control and independence between the two parties.

Some folks interchange the words employee and independent contractor when they are two distinct terms. An employee is not considered an independent contractor. An independent contractor is a different classification of worker. They are considered self-employed and are responsible for their own taxes. Independent contractors are free to perform services how they want and when they want. Generally, those who hire independent contractors are not required to withhold and remit payroll taxes on behalf of the contractor.
 

Types of Federal Payroll Taxes and Who Pays What

Federal employment taxes include federal income tax, Social Security tax, Medicare tax, Additional Medicare tax, and federal unemployment tax.

• Federal Income Taxes: As a general rule, employers are required to withhold federal income taxes from their employee’s gross wages. This is because the U.S. has a “pay as you go” tax system, meaning taxpayers must pay the tax due on their income as it is received throughout the year. Employers use the information their employees entered on Form W-4, Employee’s Withholding Certificate, to determine the amount of federal income tax to withhold from their employees’ gross wages. While it is the responsibility of the employer to withhold and remit an employee’s federal income tax, only the employee pays the tax.
• Social Security Taxes: Created by the Federal Insurance Contributions Act (FICA), Social Security taxes finance Old-Age, Survivors, and Disability Insurance (OASDI) programs. For years, the total Social Security withholding rate has been 12.4%, which is divided and paid for equally by employees and their employers (6.2% each). Social Security has a yearly maximum wage base limit. Once a taxpayer reaches the maximum wage base (for 2025, the wage base limit is $176,100), neither the employer nor the employee is required to pay any more Social Security tax on the employee’s wages for the remainder of the year.
• Medicare Taxes: Also born out of FICA, Medicare taxes are withheld from taxpayer earnings to help pay for hospital insurance for those who qualify for Social Security and Medicare. The total Medicare withholding rate is 2.9%, which is divided equally between the employer and employee (1.45% each). Unlike Social Security taxes, Medicare taxes have no wage base limit, so all qualified wages are subject to Medicare tax.
• Additional Medicare Tax: The Additional Medicare Tax is an added payroll tax enacted in 2013 by the Affordable Care Act. Paid by the employee only, an employer is required to withhold Additional Medicare tax at a rate of 1.45% in the pay period when the employee’s wages exceed $200,000. Remember that the 1.45% tax withheld is in addition to the 1.45% of Medicare taxes withheld from an employee’s paycheck. So, once an employee’s wages exceed the $200,000 threshold, employers will withhold a total of 2.9% in Medicare taxes until the end of the year.
• Federal Unemployment Tax: Federal Unemployment Tax (FUTA) (along with state unemployment taxes) is paid solely by the employer. These taxes finance the unemployment compensation fund and provide unemployment compensation to workers who have lost their jobs.

Employers remit the payroll taxes they withhold on behalf of their employees and the portion they are responsible for paying to the IRS or state tax agency on a recurring schedule throughout the year. In addition to remitting the payroll taxes, most employers must file quarterly and annual payroll returns. These returns report to the IRS and state tax agency the total wages the employer paid and taxes withheld on behalf of the employee.
 

How employers determine wages subject to payroll taxes

Before an employer calculates the amount of federal, state, and local taxes to withhold, the employer must first reduce an employee’s gross wages by any before-tax deductions. Common examples of before-tax deductions may include an employee’s share of health insurance premiums, an employee’s 401(k) or certain other retirement plan contributions, and contributions an employee made to an employer-sponsored flexible savings account plan for qualified medical expenses or childcare expenses. Once any before-tax deductions are subtracted from the employee’s gross wages, the employer will calculate and withhold any federal, state, and local taxes, including federal, state, and local income taxes (if applicable), Social Security, and Medicare taxes. Finally, an employer deducts any after-tax deductions that may apply, such as long or short-term disability premium payments.

When employees receive their net wages, they should also receive a pay statement (also known as a paystub) detailing the income the worker received, federal, state, and local income taxes withheld, and any before- or after-tax deductions. Employees need to save a copy of their pay statements, as the information can help them verify their income, withholding, and deductions.

While federal payroll taxes are the same across the country, state employment taxes vary from state to state. Even employers and employees who reside in states that do not impose a personal income tax – such as Texas, Florida, and Alaska – must still collect and remit Social Security, Medicare, and federal and state unemployment taxes to the IRS and state tax agencies. Additionally, some states collect payroll taxes that specifically apply to their state. For example, in California, employers are required to withhold California Personal Income Tax and California State Disability Insurance from employees’ gross wages. Furthermore, California employers are required to pay California Employment Training Tax and state Unemployment Insurance.

Discovering that your employer failed to report or remit the payroll taxes that were withheld from your gross wages is a shock to the system and not the kind of surprise anyone appreciates. Of course, things happen that are out of our control – maybe our employer fell on hard times and did not remit the taxes that were withheld from our wages. But this doesn’t mean we are without resources to right our path and move forward. TaxAudit has a team of experienced tax professionals ready to guide you and help you chart the best course of action if you receive a notice from the IRS or state tax agency. For those who owe the IRS or state tax agency and need help to resolve your tax debt, you are not alone! Contact our Tax Debt Relief department today. If you owe the IRS or state tax agency but don’t know where to begin, our Tax Debt Relief department offers a free consultation.