What Laws Require Employers to File Form W-2s for California Employees?

Federal law requires that Forms W-2 be issued by employers reporting certain information regarding employee payments and withholdings.  26 U.S.C. § 6051.  Section 6721 of Title 26, United States Code, makes failure to timely file a correct Form W-2 subject to penalties, including a higher penalty for intentional disregard. (For defenses to the IRS’s intentional disregard of filing requirements penalty for Form W-2, see our article here.)

The California Unemployment Insurance Code (“UIC”) requires an employer who pays wages to “a resident employee for services performed either within or without this state, or to a nonresident employee for services performed in this state” to withhold taxes in an amount estimated to equal the employee’s California income tax liability.  Cal. UIC § 13020.  Even if the employee ultimately pays her California taxes in full, the UIC makes it clear that the employer is still in violation of the law and subject to penalties or additions to tax.  Cal. UIC § 13071.  California’s UIC also requires the employer to file returns with the EDD reporting the wages for such employee and paying over the income taxes withheld. 

Several penalties show that the state of California sees violations of the employer’s duty to report, withhold, and pay-over estimated taxes from California wages as extremely serious.  Cal. Rev. & Tax Code Sections 18668 and 19138 apply penalties for failure to withhold and for failure to file correct information returns.  Under Cal. UIC § 1735, any individual within the employer’s company who is aware of the requirement to withhold and pay over taxes as required by the above UIC sections will be made dually-liable with the employing company.

Under Cal. UIC § 2118, any person or employer who, with or without intent to evade, fails to withhold, pursuant to Section 13020 , or fails to pay over any tax withheld, is guilty of a misdemeanor and, upon conviction, shall be fined an amount not to exceed one thousand dollars ($1,000), or imprisoned for not more than one year, or both the fine and imprisonment, at the discretion of the court.

The EDD is the principal California department tasked with investigating and collecting failure to file and remit payroll taxes.  Among examples of payroll tax fraud in the EDD’s publication on the topic, the department has listed filing false payroll returns, neglecting to report all wages paid and neglecting to pay payroll taxes.[1]  Because fraud requires proving mens rea, merely filing a false return or neglecting to pay California taxes would be insufficient to prove fraud.  Nonetheless, the EDD has made reporting potential payroll tax fraud simple and accessible by allowing it to be reported online at https://edd.ca.gov/payroll_taxes/Help_Fight_Fraud.htm or through a paper “Underground Economy Operations Lead Referral/Complaint Form,” Form DE 660 Rev. 2 (8-15).  The Form DE 660 appears to be focused on the compliance issues rather than specific issues of intent and does not use the word “fraud,” making it appropriate for reporting any payroll tax non-compliance issues in California.

[1] California EDD Publication DE 2370 Rev. 2 (1-20).

Daniel W. Layton, the author of this FAQ, is a former trial attorney for the IRS Office of Chief Counsel and a former federal prosecutor in the tax division of the Los Angeles U.S. Attorney’s Office, Tax Division. He is the principal of a tax law firm in Newport Beach, California.

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