Second Circuit Holds That Title VII Back and Front Pay Awards Are “Wages” Subject to Tax Withholding

In Noel v. New York State Off. of Mental Health Cent. New York Psychiatric Ctr., 10-3483-CV, 2012 WL 3764527 [2d Cir. Aug. 31, 2012], the Second Circuit held that back pay and front pay awards under Title VII of the Civil Rights Act of 1964 are “wages” subject to mandatory tax withholding.

From the Court’s opinion:

We have little difficulty in concluding that both back pay and front pay are “wages” as defined by the Internal Revenue Code. I.R.C. § 3401(a); id. § 3121(a). Both are remuneration paid to an employee to compensate for what he would have earned had he not been the victim of discrimination. The Code requires that employers withhold taxes from remuneration paid to an employee for “services performed by an employee for his employer,” id. § 3401(a) (income tax), or for remuneration for “any service, of whatever nature, performed … by an employee for the person employing him,” id. § 3121(a), (b) (FICA tax). The term “service performed” means “not only work actually done but the entire employer-employee relationship for which compensation is paid to the employee by the employer.” …

Both Noel’s back and front pay were calculated with express reference to his employment relationship with the State and to all the wages and benefits that would have accrued absent the State’s unlawful discrimination. These amounts are “wages” because they constitute “remuneration” for services during an employee-employer relationship. “Employment” is defined broadly as “any service, of whatever nature, performed … by an employee for the person employing him.” I.R.C. § 3121(b) (emphasis added). Noel does not dispute that, had there been no judgment, these earnings would have been subject to withholding. We believe that this result is not changed because Noel had to obtain a judgment to secure the wages.

The obligation on employers to collect taxes by withholding a specified portion of the tax from wages paid is mandatary. Specifically, I.R.C. § 3102(a) provides that FICA taxes “shall be collected by the employer … as and when paid.” Likewise, the Code uses mandatory language with respect to the withholding of income taxes. See id. § 3402(a)(1) (“[E]very employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the Secretary.”) (emphasis added)). Moreover, an employer who fails to withhold FICA and income taxes from the wages of his employees, or who fails to pay those withheld taxes over to the government, can be held personally liable for an amount that is equal to the amount that should have been withheld and paid over. See id. § 6672; see also Hochstein v. United States, 900 F.2d 543, 546–47 (2d Cir.1990) (describing the elements of personal liability for willfully failing to withhold taxes).

In view of these well understood requirements, we have no difficulty understanding why the OSC believed it was obligated to withhold federal and state taxes as well as FICA, as that obligation is implied in a Title VII judgment for back and front pay.

The Court held that the district court’s determination that the State pay directly to plaintiff what the State had previously paid on his behalf in satisfaction of his tax liabilities to be “an inappropriate hit to the public fisc and an undeserved windfall to him.”

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