Mich. Admin. Code R 206.21 — Failure to withhold; withholding less than correct amount; liability

of employer.
Rule 21. (1) If an employer erroneously fails to withhold Michigan income tax
from compensation paid to an employee, or withholds less than the correct amount, he
is liable for payment of the amount whic h should have been w ithheld, whether or not
it is collected from the employee by the employer. The employer should correct the
error within the same calendar year, if possible, by deducting the difference between
the amount withheld and the amount required to be w ithheld from any
compensation still owed the employee.
(2) If the failure to withhold is in a year other than the current year, the employer
is still liable for the amount that should have been withheld and shall pay it to the
department. Any reimbursement by the em ployee to the employer is a matter between
the employer and the employee.
(3) If the employer fails to withhold the ta x as required and, thereafter, the
income tax against which the tax may be credited is paid, the tax required to be
deducted and withheld shall not be collected from th e employer. Such payment does
not, however, operate to relieve the employer from liability for penalties and interest
on the tax that should have been withheld.
(a) Example 1. An individual started a bus iness on March 1 of the current
year. He was an employer and the people on his payroll were employees subject to
collection of federal income tax at source on wages under chapter 24 of the internal
revenue code, 26 U.S.C. S4101 et seq. The employer did not register and start
withholding Michigan income tax until August 1. The employ er is liable for
withholding the correct tax from the compensation he pays his employees. He should
compute the tax he should have withheld from each employee from March 1 to
August 1 and withhold
this from each employee during the remainder of the year in addition to the
correct tax that must be withheld from each payment of compensation. This is according
to subrule (1) above.
(b) Example 2. An employer was withholding federal income tax from wages,
but was not withholding Michigan income tax. Th e department made an audit in June,
1976, and determined the following:

Figure for 206.21

The department assessed tax of $2,829.00 pl us penalty and interest against the
employer. Subsequently, the employer obtai ned signed employee wage statements
from the employees and sent them to the department.
Employee no. 2 claimed he filed MI-1040 returns for the years 1973, 1974, and
1975. The department checked its records and found returns for all 3 years and that the
employee did pay the tax on his own MI-1040. Sin ce the assessment had not been paid,
the department reduced the assessment by $1,164.00, which is the tax in the audit
for the years, 1973, 1974, and 1975. If the a ssessment had been paid, the
department would have issued a refund to the employer. This is according to subrule
(3) above. Employee no. 1 also gave his employer signed employee wage
statements claiming he filed MI-1040 returns an d paid his own tax on the wages he
received from the employer. The department ch ecked its records and could not find a
return for 1973. They found a joint return for 1974, but the adjusted gross income on
the return was $12,000.00. This was compensation the wife received as a
schoolteacher. It agreed w ith the compensation shown on the W-2 issued by the
school district. The department also found a joint return for 1975 and the employee
and his wife reported the compensation from both their employers. The department
reduced the assessment against the employer by $450.00 for the tax included in the
audit for 1975 since the employee paid the tax on this compensation on his own MI-
1040. This is according to subrule (3) abov e. The department cannot give the employer
relief for the tax he should ha ve withheld from employee no. 1 in 1973 and 1974
since the employee did not report on any MI-1040 the co mpensation he received from
the employer.
Employee no. 1 is delinquent for the year 1973 and filed a false MI-1040 for 1974.
The department will give the employee credit as tax withheld of $328.00 in 1973 and
$438.00 in 1974 at the time it confronts him a bout his individual income tax returns.
The employer shall look to the employee if he wishes to get reimbursed for these 2

amounts. This is a matter between the employer and the employee. See subrule (2)
above. The employer may recover the $449.00 ta x he did not withhold in 1976 by
deducting it from future compensation paid the employee during the remainder of
the year according to subrule (1). The employees shall be given credit for these
amounts on their 1976 W-2 plus any additional tax to
be deducted for the remainder of 1976.