Your employer will withhold federal income tax from your paycheck and pay it to the IRS. However, in some cases, your employer may not deduct any income taxes.
Let us guide you through what is federal income tax, how it is withheld from your paycheck, and the top reasons to know why it wasn’t deducted.
1) Federal Income Tax Withholding
The Internal Revenue Service (IRS) collects federal income tax on all types of income including from corporations, businesses, and individuals.
Individuals working under an employer do not directly pay federal income taxes. Their federal income taxes are withheld by their employers who then pay them to the IRS.
Self-employed individuals or working as contractors have to pay their income taxes themselves though.
Calculating taxable income includes calculating all sources of income like salary, wages, investment income, capital gains, lottery, rewards, and so on. Then, you’ll deduct credits and allowed deductions.
Most employers calculate the taxable salaries or wages of their employees electronically. Then, they deduct estimated income taxes from their salaries. So, an employee does not need to worry about the filing of income tax portion coming from an employer.
2) No Federal Income Tax Withheld from My Paycheck
Even though employees do not file their income tax portion coming from salaries directly, they should verify whether it is being paid on time.
The employers must provide Form W-2s to each of their employees showing their withheld taxes.
If your Form W-2 does not show income tax withheld or a wrong amount, you should immediately consider ratifying it to avoid a penalty from the IRS.
Employers have a deadline of January 31 of each year to notify their employees and hand them Form W-2s. If you do not receive it by then, ask for the Form W-2 to match your income tax liability.
Your income tax deadline is usually April 15 of each year. If your employer is underpaid or did not pay the taxes, you’ll owe the IRS on this date.
Let us discuss the top 5 reasons for no federal income tax withheld from your paycheck.
3) Exempt from Filing Income Taxes on Form W-4
When you start a job, you’ll hand over a Form W-4 to the employer providing your personal and tax details.
A common reason why your employer did not deduct any income tax from your paycheck could be that you wrote “exempt” on your Form W-4.
It might be due to several reasons. For instance, you may be working as a freelancer or your job entitles you as an independent contractor.
You’ll need to satisfy certain criteria to be exempted from income tax withholding by your employer.
In other cases, you may have wrongly ticked the exempt box on Form W-4. Either way, your employer wouldn’t deduct income taxes from your paycheck.
It is an easy mistake to ratify and you shouldn’t wait until April 15 or an IRS notice.
4) You Work as a Contractor or Self-Employed
If there was no mistake from your side and you noticed no deduction from your paycheck for income tax withholding, then you should consult your employer.
Your job contract may specify you as an independent contractor rather than a permanent employee.
Generally, you should know this condition when signing your job contract with the employer. You’ll notify the same on your Form W-4 to your employer as well.
In rare cases, your employer and you may different opinions about your job contract type.
You’ll still need to pay estimated taxes if you are working as an independent contractor. You’ll directly file these taxes with the IRS.
As an independent contractor you will:
- File a Schedule C to report your income and expenses.
- Also, need to file the Schedule SE to file your Medicare and Social Security tax.
Your employer will provide you the Form 1099-MISC rather than a W-2.
5) You Do Not Earn Sufficient Taxable Income
If you earn income and receive other means of money, you’ll need to pay taxes. However, if you do not meet the threshold income level, you’ll be exempt from paying taxes.
The standard deductions allowed for the tax year 2021 are $ 12,250. If you earned a total of $ 12,250 in the full year, you’ll owe $0 of income tax to the IRS.
On each dollar earned above this amount, you’ll need to pay taxes. It is important to mention that you’ll need to file for taxes anyway even if you do not pay income taxes.
Matching the gross income with the standard deductions allowed for different tax filing statuses can help you determine whether you’ll need to pay taxes or not.
Minimum gross income requirements by matching standard deductions for the year 2021 are:
- Single and under age 65: $12,550, 65 or older: $14,250
- Married filing jointly and both spouses are under age 65: $25,100, 65 or older: $26,450
- Married filing jointly and both spouses are age 65 or older: $27,800
- Head of household and under age 65: $18,800, 65 or older: $20,500
- Qualifying widow(er) under age 65: $25,100, 65 or older: $26,450
6) Your Employer Made a Mistake on Form W-2
Another common reason for no federal income tax withheld from your paycheck can be a mistake from your employer.
For example, your employer made a payroll error and didn’t calculate the correct amount of your gross income. So, there was no income tax withheld from your salary.
In other cases, your employer might have paid the correct amount but issued you the wrong Form W-2 amount. It will require a simple correction from your payroll section.
Other cases of mistakes from your employer include:
- Income tax was deducted from your salary but not paid to the IRS.
- No income tax was deducted at all.
In any case, you should notice the difference immediately and ratify it before your employer makes the next estimated tax payment.
7) Wrong Amount of Income Tax Withheld
Depending on your work nature, your gross salary may change from your employer. It means the estimated income tax amount would change.
Therefore, your employer may not withhold enough income tax from your gross income. If so, you’ll owe the IRS at the end of the tax year.
The IRS provides useful online tools to calculate and estimate income taxes. You can work with your employer to estimate the withholding taxes correctly to avoid any inconvenience.
You should provide a new Form W-4 to your employer with updated information. You may confirm the changes from your employer later.
8) Penalties for Underpayment of Estimated Taxes
If you or your employer do not submit the correct estimated income taxes, the IRS may consider it an underpayment of income tax.
In that case, you may incur an IRS penalty. It will be calculated by the IRS by considering your total taxable income, the amount of taxes paid, and the actual amount of taxes you owed to the IRS.
The IRS may also impose interest on your penalty amount as well depending on when the amount became due. The interest will be charged until you pay the full penalty amount.
If you feel the penalty is wrong, you can submit a dispute with the IRS as well.
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