My Employer Messed Up My Tax Withholding. What Should I Do?

Tax withholding mistakes can lead to unexpected tax bills or penalties, making it important to address them as soon as they are noticed. If your employer has miscalculated the amount withheld from your paycheck, you’ll need to take steps to correct the issue before it affects your tax return.

Identifying Withholding Errors

Reviewing your pay stubs is the first step in spotting a tax withholding mistake. The federal income tax withheld should match the details on your Form W-4, including your filing status, dependents, and any additional withholding amounts. If the amount deducted changes unexpectedly without a corresponding adjustment in your earnings or tax elections, there may be an issue.

State and local tax withholdings can also be incorrect. Some states require their own withholding forms, and errors may arise if the wrong tax rate is applied or if you work in one state but live in another. For instance, if you live in New Jersey but work in New York, your employer should withhold New York taxes, but you may still need to make separate payments to New Jersey. If your pay stub lists the wrong state, it could lead to an unexpected tax bill.

Social Security and Medicare taxes (FICA taxes) should be withheld at a combined rate of 7.65%—6.2% for Social Security and 1.45% for Medicare. If these amounts are incorrect or missing, it could indicate a payroll error. Employees earning more than $200,000 as single filers (or $250,000 for married couples filing jointly) should also check for the Additional Medicare Tax of 0.9%, which employers must withhold once wages exceed these thresholds.

Employer’s Role in Tax Withholding

Employers must withhold taxes accurately based on Form W-4. The IRS requires businesses to calculate and remit these withholdings regularly. Errors can occur due to payroll system misconfigurations, incorrect tax table applications, or administrative oversight.

Employers use IRS tax tables from Publication 15-T to determine the correct withholding amounts. If these tables are applied incorrectly or an employee’s filing status is misclassified, the wrong amount may be deducted. Payroll software automates these calculations, but outdated tax tables or incorrect settings can still cause errors.

State and local tax withholding can be particularly complex for employees working in multiple jurisdictions. Some states have reciprocal agreements allowing residents to be taxed only in their home state, while others require withholding in the state where work is performed. Employers must follow the correct rules for each employee’s situation to prevent unnecessary tax liabilities or overpayments.

Employers are also responsible for withholding and remitting payroll taxes like Social Security and Medicare. These taxes have strict compliance requirements, and incorrect withholdings can lead to IRS penalties. Employers must also account for the Additional Medicare Tax for high earners and ensure deductions are made once an employee’s wages exceed the applicable threshold.

Correcting W-4 Submissions

If your paycheck reflects incorrect withholdings, first review the Form W-4 you submitted to your employer. Determine whether the issue is due to an error in processing the form or if your selections need adjustment. The IRS allows employees to update their W-4 at any time, so submitting a revised form can correct future withholdings.

When updating your W-4, ensure all sections are completed accurately, especially if your financial situation has changed. Life events such as marriage, the birth of a child, or a significant change in income can affect the amount of tax that should be withheld. The IRS Tax Withholding Estimator can help determine the necessary adjustments. If your previous W-4 included outdated information, submitting a new form will allow payroll to adjust future deductions.

Employers must implement W-4 changes as soon as possible, typically no later than the first payroll period ending 30 days after receiving the updated form. If the corrections are not reflected in your next paycheck, follow up with your HR or payroll department to ensure the update was processed. Keeping a copy of the revised W-4 and any correspondence with your employer can serve as documentation if further corrections are needed.

Checking Updated Pay Stubs

After submitting a corrected W-4, review your next pay stub to ensure the adjustments were made correctly. Each pay stub provides a breakdown of earnings, deductions, and tax withholdings, allowing you to verify whether payroll updates reflect the intended changes. Compare prior withholdings to new deductions while considering any fluctuations in taxable income due to bonuses, commissions, or pre-tax benefits like 401(k) contributions and health savings account (HSA) deductions.

If the expected changes do not appear, payroll processing delays or system errors may be the cause. Employers using automated payroll software may not immediately apply W-4 updates if processing cycles have already been finalized. If adjustments are missing from your paycheck, request a payroll audit to identify miscalculations or overlooked updates.

Employees earning supplemental wages—such as overtime or bonuses—should also confirm whether these amounts are taxed at the IRS-mandated flat rate of 22% or combined with regular wages for withholding based on aggregate income.

Potential Liability for Underwithholding

If too little tax is withheld, employees may face unexpected tax bills and possible penalties when filing their returns. The IRS expects taxpayers to pay taxes throughout the year, and underpayment penalties may apply if the total tax owed exceeds $1,000 after subtracting withholdings and estimated tax payments. The penalty is calculated based on the shortfall and the length of time the underpayment existed, with interest rates that adjust quarterly.

To avoid penalties, taxpayers must ensure that at least 90% of their current year’s tax liability or 100% of the prior year’s tax liability (110% for high-income earners exceeding $150,000 in adjusted gross income) is covered through withholding or estimated payments. If a withholding error results in a shortfall, making estimated tax payments before the year ends can help reduce penalties. Some taxpayers may qualify for a penalty waiver if the underpayment was due to unforeseen circumstances, such as a casualty event or disaster. IRS Form 2210 can help determine whether a penalty applies and calculate the amount owed.

IRS Communication

If a withholding error results in unpaid taxes, the IRS may issue a notice requesting additional payment. Notices such as CP14 or CP23 outline the discrepancy and provide instructions for resolving the balance. Ignoring these notices can lead to further penalties and interest charges.

Taxpayers who receive an IRS notice should verify the accuracy of the claim by cross-referencing their tax return and pay stubs before making payments. If an employer’s mistake caused the underpayment, employees may request a corrected W-2 or seek reimbursement for penalties incurred due to payroll errors.

For those unable to pay the full amount owed, the IRS offers payment plans, including short-term extensions and installment agreements. Taxpayers can apply for these plans online or by submitting Form 9465. In cases of financial hardship, the IRS may grant temporary relief through a Currently Not Collectible status or an Offer in Compromise, which allows taxpayers to settle for a reduced amount. If a withholding issue is disputed, contacting the IRS directly or seeking assistance from a tax professional can help resolve the matter.