Why Weren’t Federal Taxes Withheld?

Federal income tax withholding ensures that individuals pay their income taxes gradually throughout the year rather than in one large sum at tax time. Employers typically deduct federal income tax from an employee’s wages and remit it to the Internal Revenue Service (IRS) on their behalf. The amount withheld is an advance payment toward the individual’s total tax liability, reported on Form W-2 at year-end.

Reasons for Insufficient Withholding

One common reason for insufficient federal tax withholding stems from incorrect settings on an employee’s Form W-4. This form dictates how much tax an employer should deduct from each paycheck. Employees might claim “exempt” status, indicating no tax liability, leading to no federal income tax being withheld.

Another factor contributing to under-withholding on Form W-4 involves claiming too many allowances or credits. Failing to update a W-4 for significant life changes, such as getting married, having a child, or taking on a second job, can result in under-withholding.

Income not subject to automatic federal income tax withholding includes earnings from self-employment, such as independent contractor work, where individuals receive Form 1099 instead of a W-2. Self-employment income is subject to self-employment tax, which covers Social Security and Medicare taxes.

Certain types of investment income, like capital gains or dividends, generally do not have taxes automatically withheld, unless subject to backup withholding rules. Some unemployment benefits are also not automatically subject to federal income tax withholding unless the recipient elects to have a flat 10% withheld. Individuals with very low income levels, whose total earnings fall below the standard deduction, may also find little to no federal tax withheld, as their income might not meet the threshold for tax liability.

Understanding Your Tax Responsibility

Federal income tax withholding serves as a payment mechanism, not the tax itself. It represents an advance payment toward an individual’s actual tax liability for the year. Regardless of whether taxes are withheld, each taxpayer is ultimately responsible for paying their full federal income tax obligation by the annual tax deadline.

For income not subject to withholding, such as self-employment earnings or certain investment income, individuals are generally required to make estimated tax payments. These are payments made directly to the IRS throughout the year, typically on a quarterly basis, to cover income and self-employment taxes. This ensures that taxes are paid as income is earned, aligning with the pay-as-you-go tax system.

Failure to pay enough tax through withholding or estimated payments throughout the year can result in underpayment penalties. The IRS may assess these penalties if the amount of tax paid during the year falls below a certain threshold, generally 90% of the current year’s tax liability or 100% of the prior year’s tax liability, whichever is smaller. IRS Form 2210 is used to calculate any underpayment penalty.

Steps to Correct Under-Withholding

Individuals who discover they are under-withheld can take proactive steps to adjust their tax payments for the current and future tax years. For wage earners, adjusting Form W-4 with their employer is the primary method to increase future withholding. The IRS provides an online Tax Withholding Estimator tool (IRS.gov/W4App) that can help determine the appropriate adjustments to make on the Form W-4.

Those with income not subject to withholding, such as self-employed individuals or those with significant investment income, should make estimated tax payments. These payments are generally due quarterly on April 15, June 15, September 15, and January 15 of the following year, though dates may shift if they fall on a weekend or holiday. Estimated taxes can be paid electronically through IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS), which allows scheduling payments up to a year in advance.

It is advisable to review one’s tax situation periodically, particularly after significant life changes like marriage, a new job, or the birth of a child. This regular review helps ensure that withholding or estimated payments accurately reflect current income and deductions, preventing potential under-withholding. If under-withholding is identified at the time of tax filing, any remaining balance must be paid to avoid additional interest and penalties.