The California Court of Appeal, Second District, held that an employer was required to withhold federal and California personal income and payroll taxes from a judgment to a former employee for “lost past wages” (back pay) and “lost future wages” (front pay). Citing Lisec v. United Airlines, Inc., 10 Cal.App.4th 1500 (1992), the trial court determined that the employer was not required to withhold taxes from the wrongful termination award. However, noting that federal decisions are particularly compelling in interpreting state tax law when federal and state tax statutes are identical (as was the case in this instance), the appellate court determined that, since Lisec was issued, the IRS and the vast majority of federal appellate courts have broadly interpreted the applicable federal provisions as requiring an employer to withhold income and payroll taxes for all “wages” arising from the employer-employee relationship, even after that relationship has terminated. In addition, the appellate court noted that, according to current IRS and federal decisional authorities, an employer that fails to withhold taxes from an award of back or front pay to a former employee exposes itself to penalties and personal liability for those taxes. Therefore, the appellate court decline to follow Lisec and instead adopted the prevailing federal view.
Cifuentes v. Costco Wholesale Corporation, California Court of Appeal, Second Appellate District, No. B247930, June 26, 2015