Is it legal for my small business employer to not withhold state taxes but pay them on my behalf?
So I've been working for this small marketing agency for about 8 months now, and I just noticed something weird on my paystub. My boss isn't withholding any state income taxes from my paycheck. When I asked about it, he said not to worry because the company will be paying my state taxes directly at the end of the year "as a benefit." I'm kinda concerned this might cause problems for me when I file my taxes next year. Has anyone dealt with this before? Is this even allowed? I don't want to end up owing a bunch of money or getting in trouble with the state tax authorities. My boss seems confident it's fine, but I want to make sure before tax season rolls around. I'm in Illinois if that matters for state tax laws. Thanks for any advice!
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James Martinez
This is definitely not how state income tax withholding should work. Your employer is required by law to withhold state income taxes from your wages and remit them to the state tax authority. They can't just "pay them on your behalf" at the end of the year. There are a few problems with this approach: First, you're legally responsible for your own tax liability, and the withholding system is designed to help you pay as you go throughout the year. Second, when you file your state tax return, it will show you had no withholding, which could trigger questions. Third, if your employer decides not to actually pay these taxes (or goes out of business), you'll be left with the liability. I'd recommend politely bringing this up with your employer and explaining that you prefer to have taxes properly withheld from each paycheck. If they're trying to do you a favor, they could just increase your salary instead.
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Olivia Harris
•But what if the employer is actually paying more than what would be withheld as like a bonus? My friend's company does something similar where they pay a higher amount than what would be withheld to cover the taxes plus a little extra. Is that still illegal?
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James Martinez
•The issue isn't about the amount being paid, but rather how it's being handled. Even if the employer wants to pay more than your actual tax liability as a benefit, the proper way to do this is to increase your salary or provide a separate bonus (which would be taxable income itself), and then properly withhold taxes from your entire compensation. An employer paying your personal tax obligations directly creates several problems from a tax accounting perspective. The payment of your taxes by your employer is actually considered additional taxable income to you (called "grossing up"), which creates its own tax liability. This can create a circular calculation that gets complicated quickly.
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Alexander Zeus
I had a similar situation a couple years back and ended up using https://taxr.ai to help me figure out exactly what was going on with my withholdings. My employer was a small business too and thought they were doing me a favor by "handling" my state taxes. I uploaded my pay stubs and W-2 to taxr.ai and their system flagged this exact issue right away. It turns out what my employer was doing wasn't just incorrect—it was creating a potential tax liability for me. The platform gave me a really clear explanation of the issue and even helped me draft a conversation starter to use with my boss.
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Alicia Stern
•How exactly does this work? Do you have to pay for an analysis or can you just ask questions? I'm having a somewhat similar issue but with local taxes instead of state taxes.
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Gabriel Graham
•Sounds suspicious tbh. Is this just some tax prep service or something actually helpful? I've been burned by "tax help" sites before that just try to upsell you.
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Alexander Zeus
•It functions like an AI tax assistant specialized in analyzing documents and tax situations. You can upload documents like pay stubs, W-2s, or tax notices, and it analyzes them for issues or inconsistencies. I didn't need to pay for basic questions - they have a free tier that covers most common situations. For local tax withholding issues, it's definitely relevant. The system knows about state AND local tax withholding requirements across different jurisdictions, which was super helpful in my case since my employer was confused about city tax obligations.
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Gabriel Graham
Ok I have to admit I was pretty skeptical about taxr.ai but I gave it a try after seeing the recommendation here. Holy crap it was actually super helpful! I uploaded my last 3 pay stubs where my employer was doing this weird "we'll pay your taxes later" thing, and the system immediately identified it as a compliance issue. It even showed me the specific Illinois regulations that require employers to withhold state income tax. I sent the info to my boss along with the explanation from the site, and she immediately fixed the issue. Apparently our new payroll person just didn't understand how it was supposed to work. Now my withholdings are correct and I don't have to worry about a surprise tax bill!
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Drake
If you're having trouble getting your employer to understand or fix this issue, you might need to talk directly to someone at the Illinois Department of Revenue. I had this exact problem last year, but couldn't get through to a real person at the IDOR for weeks. I found this service called Claimyr (https://claimyr.com) that got me a callback from the state tax agency in about 20 minutes when I had been trying for days on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Basically it navigates the phone system for you and puts you in line for a callback so you don't have to wait on hold forever. The state tax agent I spoke with confirmed that what my employer was doing was incorrect and even sent me official documentation I could show them explaining the withholding requirements.
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Chloe Boulanger
•Wait, there's a way to actually get through to the tax department without waiting on hold for 2 hours? How much does this service cost? Seems too good to be true.
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Sarah Jones
•Yeah right. This sounds fake. There's no way to "skip the line" with government agencies. They make everyone wait equally long. I bet this is just another scam trying to get people to pay for something that doesn't work.
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Drake
•The service doesn't let you "skip the line" - it just handles the waiting for you. Instead of you personally sitting on hold for hours, their system stays on hold and then calls you when a representative is available. I believe they use some tech that navigates phone trees and holds your place in line. It's not free, but it was worth it for me because I was getting nowhere trying to call myself. After trying to get through for almost two weeks on my own, I got a callback in under 30 minutes using their service. The documentation the tax agent provided was exactly what I needed to resolve my withholding issue.
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Sarah Jones
I need to publicly eat my words here. After dismissing the Claimyr thing as a scam, I was still stuck dealing with this exact same problem at my job. Got desperate enough to try it yesterday, and I actually got a call back from the Illinois Department of Revenue in about 40 minutes. The agent confirmed everything the first commenter said - employers absolutely cannot "just pay your state taxes for you" at the end of the year. It's not a legitimate arrangement. She explained that my income taxes are my personal liability, and my employer needs to withhold them properly from each paycheck. She emailed me the relevant tax code section to show my boss. My employer is fixing our payroll system now. Honestly relieved because I was worried about getting hit with penalties next April!
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Sebastian Scott
I'm a small business owner and I can tell you from experience that your boss is making a mistake, even if they have good intentions. What they're describing isn't how payroll taxes work. When I first started my business, I made some payroll tax mistakes that ended up costing me and my employees. The proper way to handle this would be for your employer to either: 1) Withhold state taxes properly from your paycheck, or 2) Give you a raise that covers what your state tax liability would be, and then still withhold taxes from that higher amount
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Chloe Boulanger
•Thanks for the insight from the business owner perspective! Do you think my boss is doing this to save money somehow? Or is it more likely just confusion about how payroll taxes work?
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Sebastian Scott
•From my experience, it's most likely confusion rather than an attempt to save money. When I started my business, I was surprised by how complicated payroll tax requirements are. Many small business owners, especially if they're doing payroll themselves or using a non-professional service, simply don't understand all the requirements. This is actually a common misunderstanding - thinking you can just "cover" someone's taxes as a benefit. What your employer might not realize is that paying your taxes for you is actually considered additional taxable income itself! So they're creating a more complicated situation than just doing regular withholding. I'd approach your boss with the assumption that they're trying to do something good but just don't understand the proper procedure.
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Emily Sanjay
If your employer has been doing this for a while, check your pay stubs from previous pay periods to see if state taxes were ever being withheld. You might need to look at your previous year's W-2 (box 17) to see if state taxes were reported as withheld.
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Jordan Walker
•This is good advice. I'd also suggest checking if your W-2 from last year properly reflects your state wages in Box 16. If your employer is handling state taxes incorrectly, they might also be reporting incorrectly on tax forms.
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Emma Johnson
I'm dealing with a similar situation at my company right now! My employer has been doing this "we'll pay your taxes as a benefit" thing for the past 6 months, and I've been getting increasingly worried about it. After reading through all these responses, I'm definitely going to bring this up with HR tomorrow. It sounds like even though my boss thinks they're doing something nice for us, they're actually creating potential problems. The point about this being considered additional taxable income is especially concerning - I had no idea about that. Has anyone here had success getting their employer to switch back to normal withholding mid-year? I'm wondering if there are any complications with changing the withholding system partway through the tax year, or if it's pretty straightforward to fix.
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Lucas Adams
•Switching back to proper withholding mid-year is actually pretty straightforward! I went through this exact situation last year with my employer. From an administrative standpoint, your payroll department just needs to start withholding the correct state tax amount from your remaining paychecks this year. The key thing is making sure your year-end W-2 accurately reflects what was actually withheld versus what your employer paid directly. You might end up with a slightly more complicated tax return since you'll have some months with proper withholding and some without, but that's totally manageable. The important thing is getting it fixed now rather than waiting until next year. One thing to keep in mind - if your employer has already "paid" some of your state taxes directly to the state (which honestly I doubt they actually have), that creates additional complications because those payments would be considered taxable income to you. But if they've just been promising to pay them later, then switching to normal withholding now prevents that whole mess. Good luck with HR! Most of the time when you explain the compliance issues, they're pretty quick to fix it.
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