Withholding Payroll Taxes on Lost wages

Cifuentes v. Costco Wholesale Corp. (CA2/3 B247930 6/26/15) Withholding Payroll Taxes on Lost Wages

 In the past, when an employee successfully sued his employer for lost wages, the employer could not withhold appropriate taxes from the award.  That has now changed.  At this point employers are allowed (probably should) withhold taxes from an adverse judgment to an employee for lost wages.  At least if you didn't beat him in court, you can save face by making him pay his appropriate taxes to the IRS.

Cifuentes won a judgment for lost wages against his former employer, Costco Wholesale Corporation (Costco).  Costco withheld federal and state payroll taxes from the award.  Cifuentes claimed the judgment was not satisfied, citing the decision in Lisec v. United Airlines, Inc. (1992) 10 Cal.App.4th 1500, 1507 (Lisec), that an employer is not required to withhold payroll taxes from an award of lost wages to a former employee.  Believing it was bound by Lisec, the trial court ruled the withholding was improper and denied Costco's motion for acknowledgment of satisfaction of the judgment.  We conclude this was error.

In the 23 years since Lisec, the Internal Revenue Service (IRS) and the vast majority of federal appellate courts have broadly interpreted the applicable Internal Revenue Code (IRC) provisions as requiring an employer to withhold payroll taxes for all "wages" arising from the employer-employee relationship, even after that relationship has terminated.  Persuaded by these authorities, we adopt this prevailing view and conclude Costco properly withheld the payroll taxes.  The judgment having been satisfied, we reverse the trial court's order and remand with instructions.