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NO WITHHOLDING ISN'T THE SAME AS NO TAXES

May 22, 2007

Natalia Escandon worked as a seamstress in a Miami bridal shop in 2003. The bridal shop told Natalia that she was an independent contractor and didn't withhold on her earnings.

Ms. Escandon never got around to filing a return, so the IRS computed her taxes for her. The IRS said that she really was an employee, so they didn't assess self-employment taxes (presumably they are going after the bridal shop for back FICA payments). They said she did still owed income tax.

Ms. Escandon argued that the bridal shop should have withheld the tax, so the IRS should go there for the $415.58 of taxes she owed for 2003. The Tax Court ruled otherwise:

As we have noted in other cases, it is unfortunate that petitioner's employer classified her as an independent contractor and not as an employee. Had petitioner been classified as an employee, it is possible that Mimi's would have withheld the proper amounts of tax from petitioner's wages, and a deficiency in petitioner's taxes might not have occurred. See, e.g., Lucas v. Commissioner, supra. But that does not alter the fact that the first principle of income taxation is that "income must be taxed to him who earns it". Commissioner v. Culbertson, 337 U.S. 733, 739-740 (1949) (and cases cited therein).

Petitioner was paid her wages without any reduction for withheld income tax, and petitioner has not yet fully paid the tax liability on her income for 2003. We therefore hold that petitioner is liable for the deficiency in the amount respondent has determined, appropriately adjusted to incorporate respondent's above-mentioned concession.

Not that the employer is off the hook. Mimi's Bridal Shop can be assessed a tax of 1.5% of Ms. Escandon's 11,120 compensation; that's $168.15. They are also on the hook for 20% of her share of social security taxes, or another $171.51, plus the $857.57 employers share.

The moral? Even if they don't withhold, the employee still has to pay income tax.

Cite: NATALIA RAVELO ESCANDON, T.C. Memo 2007-128

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