Legally, do I have anything to worry about from having an incorrectly filed W-4?
What you did wasn't criminal. When you submitted the form it was correct. Unfortunately as your situation changed you didn't adjust the form, that mistake does have consequences.
Is there anything within my rights I can do to get the company to take
responsibility for their role in this situation, or is it basically my
fault?
It is basically your fault. The company needs a w-4 for each employee. They will use that W-4 for every paycheck until the government changes the regulation, or your employment ends, or you submit a new form.
Topic 753 - Form W-4 – Employee's Withholding Allowance Certificate
If an employee qualifies, he or she can also use Form W-4 (PDF) to
tell you not to deduct any federal income tax from his or her wages.
To qualify for this exempt status, the employee must have had no tax
liability for the previous year and must expect to have no tax
liability for the current year. However, if the employee can be
claimed as a dependent on a parent's or another person's tax return,
additional limitations may apply; refer to the instructions for Form
W-4. A Form W-4 claiming exemption from withholding is valid for
only the calendar year in which it is filed with the employer. To
continue to be exempt from withholding in the next year, an employee
must give you a new Form W-4 claiming exempt status by February 15 of
that year. If the employee does not give you a new Form W-4,
withhold tax as if he or she is single, with no withholding
allowances. However, if you have an earlier Form W-4 (not claiming
exempt status) for this employee that is valid, withhold as you did
before.
(I highlighted the key part)
Because you were claiming exempt they should have required you to update that form each year. In your case that may not have applied because of the timing of the events.
When do you submit a new form? Anytime your situation changes. Sometimes the change is done to adjust withholding to modify the amount of a refund. Other times failure to update the form can lead to bigger complication: when your marital status changes, or the number of dependents changes. In these situations you could have a significant amount of under-withheld, which could lead to a fine later on.
As a side note this is even more true for the state version of a W-4. Having a whole years worth of income tax withholding done for the wrong state will at a minimum require you to file in multiple states, it could also result in a big surprise if the forgotten state has higher tax rate.
Will my (now former) employee be responsible for paying their portion of the taxes that were not withheld during the 9 months I was
full-time, tax Exempt?
For federal and state income taxes they are just a conduit. They take the money from your paycheck, and periodically send it to the IRS and the state capital. Unless you could show that the pay stubs said taxes were being withheld, but the w-2 said otherwise; they have no role in judging the appropriateness of your W-4 with one exception.
Finally, and I am not too hopeful on this one, but is there anything I
can do to ease this tax burden? I understand that the IRS is owed no
matter what.
You have one way it might workout. For many taxpayers who have a large increase in pay from one year to the next, they can take advantage of a safe-harbor in the tax law. If they had withheld as much money in 2015 as they paid in 2014, they have reached the safe-harbor. They avoid the penalty for under withholding. Note that 2014 number is not what you paid on tax day or what was refunded, but all your income taxes for the entire year.
Because in your case your taxes for the year 2014 were ZERO, that might mean that you automatically reach the safe-harbor for 2015. That makes sense because one of the key requirements of claiming exempt is that you had no liability the year before. It won't save you from paying what you owe but it can help avoid a penalty.
Lessons
- Always update your federal and state W-4s.
- always check your pay stubs.
