Why Is Federal Tax Not Being Withheld?
Understand why federal income tax might not be withheld from your wages or other income, aiding your financial clarity.
Federal tax withholding is a pay-as-you-go method for individuals to meet tax obligations throughout the year. A portion of income is regularly remitted to the government as it is earned, preventing a single, large payment at year-end. This system helps prevent taxpayers from facing a substantial tax bill when filing their annual income tax returns. Withholding estimates the tax owed, but it is an approximation, not the final amount due.
The Fundamentals of Federal Tax Withholding
When an individual begins a new job, they complete Form W-4, the Employee’s Withholding Certificate, which provides employers information to calculate federal income tax deductions from each paycheck. This form considers factors such as the employee’s filing status (e.g., single, married filing jointly), the number of dependents claimed, and any additional income, deductions, or credits anticipated.
Employers are responsible for calculating the appropriate withholding amount based on the employee’s W-4 and the applicable federal tax withholding tables. The withheld funds are then sent directly to the Internal Revenue Service (IRS) on the employee’s behalf. Tax liabilities are gradually covered throughout the year, with the total amount withheld appearing on the employee’s Form W-2, Wage and Tax Statement, at year-end. If too much tax is withheld, an employee may receive a refund; conversely, if too little is withheld, they may owe additional taxes when filing their return.
Reasons for Reduced or Zero Withholding on Wages
Reduced or zero federal tax withholding from an employee’s wages can occur. One reason is an employee claiming “exempt” status on their Form W-4. To qualify, an individual must have had no federal income tax liability in the previous tax year and anticipate none in the current year. This exempt status must be re-filed annually, typically by mid-February, to remain effective.
Another factor is the information provided on the Form W-4. Employees can adjust their withholding by indicating a higher number of dependents, which reduces the amount of income subject to withholding. Claiming anticipated tax credits, such as the Child Tax Credit, or significant deductions can also lower the calculated withholding amount. The updated W-4 form, revised in 2020, no longer uses “allowances” but instead guides employees to account for dependents, other income, and deductions directly.
Individuals with very low annual incomes may experience minimal or no federal tax withholding, even without specific W-4 adjustments. This occurs if their total income falls below the standard deduction for their filing status. For the 2025 tax year, the standard deduction is $15,750 for single filers and married individuals filing separately, $31,500 for married couples filing jointly, and $23,625 for heads of household. If an individual’s taxable income, after accounting for deductions, is less than this threshold, they may not have any federal income tax liability, resulting in no withholding.
Income Sources Not Subject to Standard Withholding
Other income sources are not subject to standard federal tax withholding rules. Income from self-employment or independent contracting is one example. Individuals working as freelancers or independent contractors do not have an employer to withhold taxes from their payments. Instead, they pay self-employment taxes, covering Social Security and Medicare contributions at 15.3% on net earnings, plus federal income tax. These individuals generally must make estimated tax payments quarterly to the IRS if they expect to owe at least $1,000 in tax for the year.
Investment income also typically lacks automatic federal tax withholding. This includes interest income, dividends, and capital gains from the sale of assets. While these earnings are taxable, the payer, such as a brokerage firm or bank, does not usually withhold federal income tax unless specific circumstances trigger backup withholding. Taxpayers receiving substantial investment income often need to make quarterly estimated tax payments to cover their obligations, including any Net Investment Income Tax (NIIT) of 3.8% for higher-income individuals.
Retirement distributions also have varied withholding rules. Some periodic pension or annuity payments may be treated like wages for withholding. Other distributions, such as from IRAs or 401(k) plans, may have a default withholding rate or allow the recipient to elect withholding. For example, eligible rollover distributions from qualified plans are generally subject to a mandatory 20% federal income tax withholding, though this can be avoided by a direct rollover. Individuals receiving retirement income often use Form W-4P to adjust their withholding or make estimated tax payments.