It is generally not possible for an employee to successfully sue an employer simply for failing to withhold federal taxes; however, if taxes were withheld but not paid, the employer is liable to the IRS, not the employee. If taxes were not withheld at all, the responsibility falls on the employee to pay them.
For federal tax withholding: Submit a new Form W-4 to your employer if you want to change the withholding from your regular pay. Complete Form W-4P to change the amount withheld from pension, annuity, and IRA payments. Then submit it to the organization paying you.
You can report alleged tax law violations to the IRS by filling out Form 3949-A online.
If your employer withholds federal taxes from your paycheck but doesn't pay them to the IRS, you still get credit for the withheld amount if you have proof (like paystubs), but the employer faces severe consequences, including the Trust Fund Recovery Penalty (100% of unpaid taxes), heavy fines, interest, and potential criminal charges like fraud, while the IRS aggressively pursues collection from the business and responsible individuals. You should report the fraud to the IRS to protect yourself and gather documentation like pay stubs.
Suing your employer can be worthwhile for significant unlawful actions (like discrimination, harassment, or retaliation) to recover damages (lost wages, emotional distress) and hold them accountable, but it's a stressful, time-consuming, and uncertain process with potential career repercussions, so it's crucial to weigh potential gains against costs and seek advice from an employment lawyer to assess if the evidence, damages, and your willingness to endure litigation justify it.
Having too little withheld from your paychecks could mean an unexpected tax bill or even a penalty for underpayment. If you have a side job but don't have any taxes withheld from that income, you can submit a new W-4 to adjust the withholdings at your main job to account for the increase in income.
Exemption from withholding
An employee can also use Form W-4 to tell you not to withhold any federal income tax. 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.
If your employer messed up your withholding, you need to notify them immediately to correct it on future paychecks, file a corrected Form W-4, and be prepared to settle any underpayment or penalty on your tax return, potentially by making estimated payments, though you can ask your employer to cover penalties if they ignored your W-4. For over-withholding (too much taken), your employer can issue a refund and adjust filings; for under-withholding (too little), you must still pay the owed tax, and if you owe over $1,000, you might face a penalty unless you can prove the employer's error.
Yes, you can still get a federal tax refund even if no taxes were withheld from your paychecks, primarily through refundable tax credits like the Earned Income Tax Credit (EITC) or the American Opportunity Tax Credit (AOTC) for education, or if your deductions and credits exceed your income. You must file a tax return to claim any potential refund, as the IRS won't send money automatically if nothing was paid in.
If the IRS determines that an employer willfully neglected to pay employment taxes, the individual could face civil penalties and criminal prosecution, including imprisonment for up to five years.
Am I responsible for paying the local services tax (LST) if my employer does not withhold it? Yes. If your employer is required to withhold the LST and does not, you should inform your employer that they are required to withhold and submit the LST.
Failure to withhold is when an employer does not withhold the correct FICA and income taxes from their employees' paychecks. Failure to pay refers to situations where employers don't pay these taxes, whether they're correctly withheld them or not. Employers have specific obligations when it comes to taxes.
If an employee qualifies for exemption from withholding, the employee can use Form W-4 to tell the employer not to deduct any federal income tax from wages. This applies only to income tax, not to Social Security or Medicare tax.
If you don't withhold taxes (or pay enough through estimated taxes), you'll likely face an IRS penalty for underpayment, owe a surprise tax bill, and pay interest on the unpaid amount, as the U.S. has a pay-as-you-go system; employers face Trust Fund Recovery Penalties or even criminal charges for willfully failing to withhold for employees.
Employers are required by law to withhold employment taxes from their employees. Employment taxes include federal income tax withholding and Social Security and Medicare taxes.
If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
Short answer: In 2025, the best way to win a wrongful termination case in California is to prove that your employer fired you for an illegal reason, such as discrimination, retaliation, or violation of public policy.