Tax Withholding Is Voluntary
TAX WITHHOLDING IS VOLUNTARY
(Editor’s note: Emphasis has been added to statutes where appropriate.)
PREFACE: The Internal Revenue Code chapter which relates to withholding is Chapter 24, titled "COLLECTION OF INCOME TAX AT SOURCE." It is extremely important to note that this chapter contains no section imposing any tax. Rather, the entire chapter is written to establish and authorize provisions for withholding of tax merely as a method for the payment of taxes which may be imposed in other sections of the Code.
Whenever a tax is imposed, there is always a section containing words such as "there is hereby imposed a tax ..." Notice in Chapter 24 that no such wording exists in any section; so clearly the entire chapter merely sets forth the procedures for collecting taxes imposed elsewhere in the Code by the withholding methods described in the code sections of the chapter. Provisions of this withholding chapter are applicable only to "employees" and "wages" as defined in code sections 1402(d) as follows:
Section 1402(d). Employee and wages.
The term "employee"and the term "wages" shall have the same meaning as when used in Chapter 21 (sec. 3101 and following, relating to Federal Insurance Contributions Act).
Also note the absence in this code definition of any words of limitation such as "for purposes of this chapter" or "for purposes of this subchapter". This definition means, therefore, that whenever and wherever the terms "employee" and "wages" are used anywhere throughout the Code, their applications are limited to those people involved in activities within the four island possessions only (Commonwealth of Puerto Rico, the Virgin Islands, Guam and American Samoa), the same as in Chapter 21, the FICA or social security tax chapter. This concept will be discussed in greater detail in the social security article.
You might be surprised to learn that the filing of a Form W-4, Employee’s Withholding Allowance Certificate is strictly voluntary. Also, the submission of a social security number is also voluntary. The following two regulations govern these items.
26 CFR 31.3402(f)(2)-1. Withholding exemption certificates.
(a) On commencement of employment. On or before the date on which an individual commences employment with an employer, the individual shall furnish the employer with a signed withholding exemption certificate relating to his marital status and the number of withholding exemptions which he claims, which number shall in no event exceed the number to which he is entitled, or, if the statements described in Sec. 31.3402(n)-1 are true with respect to an individual, he may furnish his employer with a signed withholding exemption certificate which contains such statements. For form and contents of such certificates, see Sec. 31.3402(f)(5)-1. The employer is required to request a withholding exemption certificate from each employee, but if the employee fails to furnish such certificate, such employee shall be considered as a single person claiming no withholding exemptions.
26 CFR 301.6109-1. Identifying numbers.
(c). If the person making the return, statement, or other document does not know the taxpayer identifying number of the other person, and such other person is one that is described in paragraph
(b)(2)(i), (ii), (iii), or (vi) of this section, such person must request the other person's number. The request should state that the identifying number is required to be furnished under authority of law.
When the person making the return, statement, or other document does not know the number of the other person, and has complied with the request provision of this paragraph (c), such person must sign an affidavit on the transmittal document forwarding such returns, statements, or other documents to the Internal Revenue Service, so stating.
These two regulations make clear that employers are only required to request a Form W-4 and a social security number from any individual they hire. Notice that nowhere in either of these regulations is the employer mandated to withhold anything from an individual’s earnings. This is very important. Another important regulation governing withholding agreements is the following:
26 CFR 31.3402(p)-1. Voluntary withholding agreements.
(a) In general. An employee and his employer may enter into an agreement under section 3402(b) to provide for the withholding of income tax upon payments of amounts described in paragraph (b)(1) of
Sec. 31.3401(a)-3, made after December 31, 1970...
(b) Form and duration of agreement. (1)(i) Except as provided in subdivision (ii) of this subparagraph, an employee who desires to enter into an agreement under section 3402(p) shall furnish his employer with Form W-4 (withholding exemption certificate) executed in accordance with the provisions of section 3402(f) and the regulations thereunder. The furnishing of such Form W-4 shall constitute a request for withholding. ...
(ii) In the case of an employee who desires to enter into an agreement under section 3402(p) with his employer, if the employee performs services (in addition to those to be the subject of the agreement) the remuneration for which is subject to mandatory income tax withholding by such employer, or if the employee wishes to specify that the agreement terminate on a specific date, the employee shall furnish the employer with a request for withholding which shall be signed by the employee, and shall contain--
(a) The name, address, and social security number of the employee making the request,
(b) The name and address of the employer,
(c) A statement that the employee desires withholding of Federal income tax, and applicable, of qualified State individual income tax (see paragraph (d)(3)(i) of Sec. 301.6361-1 of this chapter (Regulations on Procedures and Administration)), and
(d) If the employee desires that the agreement terminate on a specific date, the date of termination of the agreement...
(2) An agreement under section 3402 (p) shall be effective for such period as the employer and employee mutually agree upon. However, either the employer or the employee may terminate the agreement prior to the end of such period by furnishing a signed written notice to the other.
This regulation states that in order for an employer to withhold, they must receive a request from an individual, and both parties must agree to the request. Also, a signed Form W-4 constitutes a request for withholding which may be terminated by either party with a signed written notice to the other. So why then do many employers continue to withhold even after individuals notify the employers by written notice to stop withholding? Most employers defend themselves by saying that section 3402 requires them to withhold. Let’s take a look at this section and see if this is indeed the case.
Section 3402. Income tax collected at source.
(a) Requirement of withholding. (1) In general. Except as otherwise provided in this section, every employer making payment of 'wages' shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the Secretary.
We see that employers are required to deduct and withhold a tax from any payment of wages that they make to any individual. So if your employer is paying you wages, then they are required to withhold taxes from your earnings. Again, the Code defines wages for us, so we can see if this is what our employer is paying us.
Section 3401. Definitions
(a) Wages. For purposes of this chapter, the term ‘wages’ means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include remuneration paid--
(8)(A) for services for an employer (other than the United States or any agency thereof)--
(i) performed by a citizen of the United States if, at the time of the payment of such remuneration, it is reasonable to believe that such remuneration will be excluded from gross income under section 911; or
(ii) performed in a foreign country or in a possession of the United States by such a citizen if, at the time of the payment of such remuneration, the employer is required by the law of any foreign country or possession of the United States to withhold income tax upon such remuneration; or
(B) for services for an employer (other than the United States or any agency thereof) performed by a citizen of the United States within a possession of the United States (other than Puerto Rico), if it is reasonable to believe that at least 80 percent of the remuneration to be paid to the employee by such employer during the calendar year will be for such services; or
(C) for services for an employer (other than the United States or any agency thereof) performed by a citizen of the United States within Puerto Rico, if it is reasonable to believe that during the entire calendar year the employee will be a bona fide resident of Puerto Rico; or
(D) for services for the United States (or any agency thereof) performed by a citizen of the United States within a possession of the United States to the extent the United States (or such agency) withholds taxes on such remuneration pursuant to an agreement with such possession; or
Notice that section 911 appears again. We already know from the discussion of gross income whether or not we have income as defined under section 911. If you do not have gross income as defined under section 911, then you do not earn wages, and your employer is not required to withhold any amounts from your earnings.
In summary, the provisions of the Constitution cited previously under Article 1, Section 2, Clause 3 and Article 1, Section 9, Clause 4 prohibit any Federal direct tax on the people or their property within the states of the union, unless it is apportioned. If it were constitutionally lawful for the Federal government to impose upon us a direct tax on our earnings in the fifty states of the union without apportionment, and without being in conflict with these constitutional limitations why would all the above cited sections clearly show the VOLUNTARY nature of all withholding?
Why, in fact, would the Federal government not have a clear and unambiguous single section in the Code which would simply say that all of us who work for a living in this country are required to give Big Brother whatever portion of our earnings it decides to take? If such a law were constitutional, it would surely be included in the Code. Why all the convoluted, complicated provisions showing geographical and other limitations and voluntary "requests" for withholding?
The answer is clear: No such simple taxing statute is possible because the federal government is constitutionally prohibited to lay a Federal direct tax on the fruits of our labor inside the fifty states of the union without apportionment. All the provisions of the Code and the implementing regulations are strictly limited in order to be in conformity with these constitutional limitations.
Lastly, notice that the employer is the only one liable for the payment of withholding taxes.
Section 3403. Liability for tax.
The employer shall be liable for the payment of the tax required to be deducted and withheld under this chapter, and shall not be liable to any person for the amount of any such payment.
So if the employer is not required to withhold from an individual, the employer cannot be liable for any withholding tax regarding that individual. Simple. In addition to the thousands of small businesses that do not withhold from employees who desire to keep their hard earned pay, large companies such as Unisys, Coca-Cola, and Martin-Marietta also do not withhold when instructed. You can stop withholding by notifying your employer of 26 C.F.R. 31.3402(p) which governs withholding, rescinding your signature on any previously filed Form W-4, and stating that you desire to terminate the withholding agreement effective the last pay period of the month. It has been the experience of many that most companies will comply with the instruction not to withhold once they are educated as to the law. However, if your employer refuses to stop withholding after you send them a termination letter, you have two choices; either endure the willful violation of your right to property, or else sue in local court for breach of employment contract. Most states have laws regulating payment of earnings to individuals. For example, Pennsylvania has its Wage Payment and Collection Law, 43 P.S. 260. It states at section 260.3 in pertinent part:
"The wages shall be paid in lawful money of the United States or check, except that deductions as provided by law, or as authorized by regulation of the Department of Labor and Industry for the convenience of the employe, may be made including deductions of contributions to employe benefit plans which are subject to the Employee Retirement Income Security Act of 1974, 29 U.S.C. 1001 et seq."
This statute also provides a remedy in a civil action for recovery of any earnings not paid which are due an individual. 34 Pennsylvania Code 9.1 lists thirteen "Deductions provided by law" which "may be made for the convenience of the employe." You will have to do research in your own county law library as to what statute governs this issue in your state.