Paying withholding tax

A proposed update to tax withholding penalties came under discussion March 3 by the House Taxes Committee.

The penalty proposed in HF885, sponsored by Rep. Ann Lenczewski (DFL-Bloomington), is part of a Department of Revenue bill to clean up technical language and has non-budget recommendations from the department.

The withholding penalty would affect employers in construction trades who fail to withhold income tax from wages, or pay to independent contractors, when required. Members questioned why the employer would be at fault and not the independent contractor who should be withholding the tax on their own.

“This is very confusing,” said Rep. Loren Solberg (DFL-Grand Rapids).

Mark Pederson, a department attorney, said employers are allowed a credit for taxes paid by the employees. “So if the employees file their returns, the employer is off the hook for having to pay for the withholding,” he said. If there is a question about whether the tax was withheld for an independent contractor, the department would have to conduct a full audit of each of the independent contractors hired to determine if they claimed all income.

“If I’m an employer, am I penalized in this situation if (the independent contractor) doesn’t do what they are supposed to do or are they?” asked Rep. Laura Brod (R-New Prague).

Pederson said if the person hired is an independent contractor and they don’t withhold any tax, there would be no consequence to the employer. Brod added that she, too, thought this section was confusing and hoped to have future discussion on the topic.

The bill was laid over for possible omnibus bill inclusion. A companion, SF681, sponsored by Sen. Tom Bakk (DFL-Cook), was tabled Feb. 18 by the Senate Taxes Committee.