If employer and employee agree to take out taxes and employer does not what can employee do?

This is not something either gets to agree to...it is the law, taken very, very seriously and if your an emplyer you must withhold tax (and contribute o FICA and in most cases State programs too, on your behalf) on your employees exactly as specified...no option...not doing so is criminal and there is no Corporate protection...the officers of the Co are personally liable. Don't mess around for another second...contact the IRS and your States Labor Department. http://www.irs.gov/localcontacts/index.html