Federal withholding refers to the federal income tax and Social Security and Medicare taxes your employer is supposed to take out of your earnings. If enough federal taxes are not withheld, you’ll likely owe the Internal Revenue Service when you file your tax return. You also won’t get credited for Medicare and Social Security benefits until the associated taxes are paid. A number of reasons can cause insufficient withholding.
Federal income tax withholding is driven by the number of allowances you claim on Form W-4. Each allowance you claim lowers your taxable wages. If you claim too many allowances, an insufficient amount of taxes will be withheld from your pay and you will owe taxes when you file your income tax return. Go through your Form W-4 to ensure you are claiming the correct number of allowances.
Wrong Filing Status
The filing status you claim on Form W-4 affects federal income tax withholding. For example, married status puts you in a lower tax bracket than single. If you claim married on the W-4 but file your federal tax return as married filing separately, the single tax rate applies, which means higher taxes. Specifically, during the prior year, the reduced married rate applied to your paycheck withholding, but when you file your tax return the single rate applies. In this case, if you plan to file separately from your spouse, check “Married, but withhold at higher Single rate” on the W-4.
Additional Tax Option
Insufficient federal income tax withholding can happen if you’re married and you and your spouse both work but you didn’t complete the Two Earners/Multiple Jobs Worksheet on page 2 of Form W-4. By completing that section of the form and stating the additional amount you want withheld from each of your paychecks on line 6, you avoid having too little tax withheld.
If you claim that you are exempt on your Form W-4 but don’t qualify for it, you’ll end up owing federal income tax. Claiming exempt causes your employer to not withhold any federal income tax from your paychecks. You cannot claim exempt if someone else claims you as a dependent or if your wages and non-wage income exceed $750 for the year.
If you filled out Form W-4 correctly, but the wrong amount of federal income tax is being withheld, your employer probably made a calculation error. For example, your employer might be calculating the withholding at married status with five allowances when it should be married at the single rate with two allowances. Or, your employer might have failed to add the extra withholding amount stated on line 6 of the form. For Medicare and Social Security taxes, your employer might be calculating the withholding rates at less than the required flat percentages.
An employer might not withhold federal taxes from cash payments to escape paying its share of taxes. The lack of a paper trail makes it harder to track this type of activity. The IRS advises employees to report such employers. Some states require employers to give cash-paid employees a wage statement each time they’re paid.
If your Form W-4 is incorrect, use the IRS withholding calculator to help you complete a new form so you avoid underpaying federal income tax. Submit the form promptly to your employer. If your employer is at fault, notify it once you recognize the error so it can fix it. If your employer refuses to fix the insufficient withholding, report it to the IRS.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.