Are you Properly Withholding Employee State and County Taxes?

If you own a business in Indiana or Michigan, you have some extra payroll tax withholding, payment, and reporting obligations.  In addition to properly withholding federal payroll taxes for each employee, you are also required to correctly withhold their state AND local (county) taxes. Failing to do so could result in extra tax charges for your business.

KLient Example

Some employers under-withhold taxes and figure their employees will just square up with the state when it comes time to file personal tax returns. As one of our clients learned, that can be a gamble.

I recently had a client go through an Indiana withholding audit where the state discovered that our client failed to correctly withhold county taxes on a number of employee W-2s. The business was then being charged for the amount that was not withheld from the employees’ paychecks.

We asked the auditor why our client was being assessed the charges if the state would just collect it from the individuals at tax time. That’s when we learned that the amounts being charged to our client were stemming from employees who never filed a tax return. The state had not received tax money from the employees so the ultimate liability fell on our client.

Work with Your Payroll Provider

Our client in the previous example outsourced their payroll to a processing company and assumed everything would be correctly withheld. In most cases, if your company’s payroll administrator has entered all required employee data and checked the appropriate boxes, the system will work as it’s intended. Sometimes boxes get missed or information at the time of set-up is not known. If you are unsure about county or local tax withholding when adding new employees to your payroll system, you can confirm with the payroll company or request that they do the set-up on your behalf.

Some payroll providers have safeguards in place to verify that all required taxes are withheld. These safeguards are driven by employee data entered during setup; e.g. employee’s address. If you’re in the process of choosing a payroll provider, you should add this to your list of questions to ask.

Take-Aways

Employers should review their employees’ withholding periodically to verify that all have the proper federal, state and county withholding. If some employees do not have county tax withheld, verify this is correct to avoid potential future liabilities.

Michelle Adams, CPA
Manager
madams@klcpas.com | 574.264.2247 ext. 321
Michelle is involved at the manager level on tax engagements. Areas of service include: Corporate tax preparation, Individual tax preparation, QuickBooks Pro Advisor, Audit, reviews and compilations, and Accounting assistance.