Document Number
16-205
Tax Type
Individual Income Tax
Description
Taxpayer's employer stopped withholding Virginia income tax. Documentation not received on withholding payments.
Topic
Withholding of Tax
Returns/Payments/Records
Date Issued
12-01-2016

December 1, 2016

Re:    § 58.1-1821 Application:  Individual Income Tax

Dear *****:

This will reply to your letter in which you seek a refund of individual income tax paid by ***** (the “Taxpayer”) for the taxable year ended December 31, 2014.

FACTS

The Taxpayer filed a Virginia resident individual income tax return for the 2014 taxable year and claimed credit for Virginia income tax withheld from his wages.  Under review, the Department found that the amount of withholding credit claimed did not match the amount reported by the Taxpayer's employer on his federal Form W-2.  As a result, the Department reduced the Taxpayer's refund.  The Taxpayer appealed, contending his employer failed to withhold Virginia income tax from his wages after March 2014.

DETERMINATION

In John M. and Alice D. Church v. Commissioner of the Internal Revenue Service, 810 F2d 1959, A.F.T.R.2d 87-469 (2nd Cir., 1987), the United States Court of Appeals has held that “the failure of the employer to withhold taxes, as it should have, did not lessen the taxpayers’ obligation to report and pay taxes on income that they in fact received.”  Thus, while an employer may have been required to withhold Virginia income tax from an employee's compensation under Va. Code § 58.1-461 et seq., the employee is responsible for reporting the income and paying the entire tax.  See Public Document (P.D.) 95-119 (5/16/1995).

Under Virginia Code § 58.1-468, however, if an employer deducts and withholds Virginia income tax from an employee's compensation but fails to pay it to the Commonwealth, the employee is not held liable for such payment and is allowed to claim a credit for the amount that should have been paid over.  Under the statute, the employee bears the burden of proving that the employer deducted and withheld such tax.

VEC Unemployment Benefits

The Taxpayer contends that the fact that the VEC (Virginia Employment Commission) granted him unemployment compensation when he separated from his employer proves he was a wage employee and his employer should have withheld Virginia income tax.

Under Va. Code § 60.2-212 C, services performed by an individual for remuneration are deemed to be employment subject to the unemployment compensation provisions of Title 60.2 of the Code of Virginia, unless the VEC determines the individual is not an employee based on the application of the 20 factors set forth in Internal Revenue Service (IRS) Revenue Ruling 87-41 (1987-1 C.B. 296) to determine whether an employer-employee relationship exists.

The Taxpayer asserts that the VEC conducted an investigation and determined he was an employee.  The Department requested more information regarding the Taxpayer's case with the VEC, but the only documentation the Taxpayer provided was a summary of the unemployment benefits he received in 2014.  Regardless, the VEC's determination pertains solely to an individual's eligibility for unemployment benefits under Title 60.2 of the Code of Virginia.  The Department separately administers the Commonwealth's tax laws as set forth in Title 58.1 of the Code of Virginia and is not bound by any such determination for purposes of determining the extent an employer may have been liable for withholding tax.

In addition, it appears that the Taxpayer may have been eligible for unemployment benefits even though his employer stopped reporting his wages after March 2014.  Under Va. Code § 60.2-204, the “base period” for the determination of unemployment compensation is the first four quarters of the five quarters immediately preceding the first day of the claimant's benefit year.  See Va. Code § 60.2-204.  Further, in order to be eligible for benefits, the claimant had to have wages in two quarters of the base period.  See Va. Code § 60.2-212 1.

The Taxpayer first claimed unemployment benefits in March 2015.  Accordingly, the Taxpayer's base period began in the last quarter of 2013.  In this case, the Taxpayer had wages in both the last quarter of 2013 and the first quarter of 2014.  It appears, therefore, that the Taxpayer was eligible for benefits because he earned wages as an employee for those two quarters.

Federal Conformity

The Taxpayer also asserts that the Department disregarded his substitute W-2 form (federal Form 4852) in which he reported what his employer should have withheld in federal and state income tax.  Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the Internal Revenue Code (IRC), unless a different meaning is clearly required.   As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute.  Further, conformity does not extend to terms, concepts, or principles specifically provided for in Title 58.1 of the Code of Virginia.

The Taxpayer's employer issued a W-2 for the 2014 taxable year that only reported wages for a portion of the taxable year.  When he filed his federal income tax return, the Taxpayer submitted a substitute W-2, claiming both federal and Virginia income tax withholding for the entire year.  The mere filing of a form, however, is insufficient proof that the employer deducted and withheld Virginia income tax but failed to remit such tax to the Department.  In addition, because federal conformity is limited as described above, the Department is not required to accept the form, even if the IRS has not challenged the information contained therein.  Further, it is unclear whether the IRS has undertaken any review of the Taxpayer's submission.  It is possible the forms were merely processed as submitted.  Because the IRS receives millions of tax returns each year, it is not possible for the IRS to review each one.  The mere processing of a form does not necessarily mean the information contained therein is correct.

It is also unclear why the Taxpayer's employer stopped withholding Virginia income tax.  Withholding is only required for employers who pay wages to employees. See Va. Code § 58.1-461.  As such, payments made to individuals who are considered independent contractors rather than employees are not subject to withholding.  One indicator that an individual may be an independent contractor and not an employee is that the individual operates his own business.  In this case, the Taxpayer's federal income tax return included a Schedule C showing significant business expenses incurred as a sole proprietor when compared to his total federal adjusted gross income (FAGI), which he reported as being comprised almost entirely of wages.  This reporting raises questions regarding his status as an employee or independent contractor.  It is possible that circumstances could have changed and the employer considered the Taxpayer to be an independent contractor after March 2014.  By letter dated June 22, 2016, and August 9, 2016, the Department asked for further information regarding the relationship, if any, between this business and the Taxpayer's employment, but a response was not received.

In addition, the Department requested documentation to show what amounts the employer paid directly to the Taxpayer for the 2014 taxable year, but such documentation was not provided.  In the absence of documentation showing the net amounts paid compared to the gross amount of compensation the Taxpayer was entitled to, it is unclear what amount of tax should have been withheld for the period at issue.  Such documentation is necessary to demonstrate that the employer deducted and withheld Virginia income tax but did not remit it to the Department.  Again, it is possible that the circumstances of any employer-employee relationship could have changed after March 2014.

I find, therefore, that the Taxpayer has not provided sufficient evidence to indicate his employer deducted and withheld state income tax from his wages from April to December 2014, but did not remit them to the Commonwealth.  While I empathize with the Taxpayer's circumstances, the Department is unable to issue the requested refund based on the facts and arguments presented.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site.  If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

 

                   

AR/685.M

Rulings of the Tax Commissioner

Last Updated 01/12/2017 15:37