Must an Employer Withhold Federal Taxes on an Hourly Employee?

The IRS uses a pay as you go system for federal income taxes. When it comes to withholding and paying federal income taxes, the IRS has different requirements for employers and employees. Ignoring these requirements can lead to potentially serious consequences.

TL;DR (Too Long; Didn't Read)

The IRS requires employers to withhold funds from both salaried and hourly employees’ wages for federal income taxes.

Employer Payroll Taxes for Hourly Workers

Employers are responsible for withholding and submitting payroll taxes to the IRS on behalf of all employees, both salaried and hourly. Each employee’s IRS Form W-4, Employee’s Withholding Allowance Certificate, is used to determine the amount to withhold. Employers who do not comply with the withholding requirement could be subject to criminal and civil penalties. If you are concerned that your employer did not withhold federal taxes correctly from your paycheck, you should contact the IRS. You may still be responsible for paying your income tax even if your employer did not withhold the correct amount.

Independent contractors and workers who are self-employed are paid directly by clients and are therefore not classified as employees. They are not expected to have taxes withheld from their pay but may be required to make quarterly payments to the IRS.

Employee Exemption from Withholding

Whether you’re an hourly or salaried employee, you are allowed to claim an exemption from all income tax withholding on your W-4 if you received a full refund for taxes withheld in the previous year and had no income tax liability. You also must have no expected income tax liability for the current year. In this case, you should follow instructions on the W-4 for claiming an exemption from withholding for the current tax year and submit the new W-4 to your employer.

The exemption is valid for the current tax year only and must be reclaimed for subsequent years based on your tax status. Claiming you are exempt when you actually will owe taxes could subject you to an IRS underpayment of taxes penalty, so it’s important to only take the exemption if you really qualify for it and to change your W-4 if your status changes during the year and you are no longer exempt.

Your employer is also responsible for withholding a Social Security employee tax and a Medicare tax from your wages. These taxes help ensure that you’ll have benefits available when you retire, so you should continue to have them withheld even if you are not subject to income tax withholding.

2018 Tax Law

Due to changes to the U.S. tax law for 2018, it’s recommended that employees who are subject to federal income tax withholding submit a new W-4 to make sure their employer withholds the correct amount. If you are exempt from withholding, you should write “Exempt” on line 7 of the 2018 W-4 form.

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