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I live and work in the same building. As part of my employee benefits, I pay no rent for my apartment. However, I pay 30% tax on the rent at the time I signed the lease.

Without my knowledge, my employer failed to tax me correctly for the years of 2010, 2011 and 6 months of 2012.

They recently discovered their mistake and now they want me to make it up and pay 30% tax on over $38,000. They want to deduct $150 from the next 78 paychecks and I'm paid biweekly. Can my employer do this?

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This is where?? –  littleadv Nov 16 '12 at 22:56
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It sounds like they failed to bill you in the past and are now catching up. You're just losing a free ride you had. –  Loren Pechtel Nov 17 '12 at 0:49
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You'll need to tell us where you are. Tax and law questions require a country tag. –  Chris W. Rea Nov 17 '12 at 1:12
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What does "I pay 30% tax on the rent" mean? Is this tax that is withheld by your employer from your paycheck? What does "my employer failed to tax me correctly" mean? Unless your employer is the government, your employer cannot tax you; the employer can withhold tax from your salary and send it to the government (as the employer is usually required to do by law) but then the employer is also required to tell the government that salary (plus benefits) in the amount of X was paid and tax in the amount of Y was withheld and sent in. –  Dilip Sarwate Nov 17 '12 at 12:45

2 Answers 2

(I am making the assumption that this is a US based question).

Keep in mind that the alternative is to amend your tax forms from 2010, and 2011. The IRS and the State will want their money, they might not to wait for 78 paychecks. That is 3 years.

Ask for lots of documentation, so you understand what they are doing.

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Yes the alternative is to catch it all up out of savings immediately since the benefit was received the taxes were not paid, it might even cost the OP penalties and interest. –  user4127 Nov 17 '12 at 17:57
    
In the US, if you approach the IRS they are willing to work with you. They will collect their money, but you can make a plan to pay it back however works best for you. Start early and be consistent if you have to deal with the IRS. –  MrChrister Nov 17 '12 at 20:33
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IRS allows payment plans, especially for people who have no recent non-compliance issues (you get a payment plan approved automatically if you haven't had one in the last 5 years and you're in compliance). –  littleadv Nov 17 '12 at 23:54

I assume the OP is the US and that he is, like most people, a cash-basis tax payer and not an accrual basis tax payer.

  • Suppose the value of the rental of the unit the OP is occupying was reported as income on the OP's 2010 and 2011 W-2 forms but the corresponding income tax was not withheld. If the OP correctly transcribed these income numbers onto his tax returns, correctly computed the tax on the income reported on his 2010 and 2011 1040 forms, and paid the amount due in timely fashion, then there is no tax or penalty due for 2010 and 2011. Nor is the company entitled to withhold tax on this income for 2010 and 2011 at this time; the tax on that income has already been paid by the OP directly to the IRS and the company has nothing to do with the matter anymore.

  • Suppose the value of the rental of the unit the OP is occupying was NOT reported as income on the OP's 2010 and 2011 W-2 forms. If the OP correctly transcribed these income numbers onto his tax returns, correctly computed the tax on the income reported on his 2010 and 2011 1040 forms, and paid the amount due in timely fashion, then there is no tax or penalty due for 2010 and 2011. Should the OP have declared the value of the rental of the unit as additional income from his employer that was not reported on the W-2 form, and paid taxes on that money? Possibly, but it would be reasonable to argue that the OP did nothing wrong other than not checking his W-2 form carefully: he simply assumed the income numbers included the value of the rental and copied whatever the company-issued W-2 form said onto his 1040 form. At least as of now, there is no reason for the IRS to question his 2010 and 2011 returns because the numbers reported to the IRS on Copy A of the W-2 forms match the numbers reported by the OP on his tax returns.

My guess is that the company discovered that it had not actually declared the value of the rental payments on the OP's W-2 forms for 2010 and 2011 and now wants to include this amount as income on subsequent W-2 forms. Now, reporting a lump-sum benefit of $38K (but no actual cash) would have caused a huge amount of income tax to need to be withheld, and the OP's next couple of paychecks might well have had zero take-home pay as all the money was going towards this tax withholding. Instead, the company is saying that it will report the $38K as income in 78 equal installments (weekly paychecks over 18 months?) and withhold $150 as the tax due on each installment. If it does not already do so, it will likely also include the value of the current rent as a benefit and withhold tax on that too. So the OP's take-home pay will reduce by $150 (at least) and maybe more if the current rental payments also start appearing on the paychecks and tax is withheld from them too.

I will not express an opinion on the legality of the company withholding an additional $150 as tax from the OP's paycheck, but will suggest that the solution proposed by the company (have the money appear as taxable benefits over a 78-week period, have tax withheld, and declare the income on your 2012, 2013 and 2014 returns) is far more beneficial to the OP than the company declaring to the IRS that it made a mistake on the 2010 and 2011 W-2's issued to the OP, and that the actual income paid was higher. Not only will the OP have to file amended returns for 2010 and 2011 but the company will need to amend its tax returns too.

In summary, the OP needs to know that

  • He will have to pay taxes on the value of the waived rental payments for 2010 and 2011.

  • The company's mistake in not declaring this as income to the OP for 2010 and 2011 does not absolve him of the responsibility for paying the taxes

  • What the company is proposing is a very reasonable solution to the problem of recovering from the mistake.

  • The alternative, as @mhoran_psprep points out, is to amend your 2010 and 2011 federal and state tax returns to declare the value of the rental during those years as additional income, and pay taxes (and possibly penalties) on the additional amount due. This takes the company completely out of the picture, but does require a lot more work and a lot more cash now rather than in the future.

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