Normally, your employer will withhold federal income tax from your paycheck and pay to the IRS (internal revenue services). However, sometimes your employer does not deduct any income tax.
While at first instinct, you might be happy that you did not have to pay tax but it might impact you in the future.
So, why is no federal income tax withheld from your paycheck? Is it due to error, or is there a legitimate reason you don’t have to pay that tax? Let’s discuss potential reasons.
Reasons why you might not have deducted federal income tax:
We know that federal tax applies to all of your income including employment income. Generally, this tax is withheld.
However, sometimes there is a confusing situation when your employer does not deduct the federal income tax from your paycheck. In this article, we shall discuss potential reasons for not deducting.
Let us discuss the top five reasons:
- You work as a contractor or self-employed and are not considered an employee.
- You do not earn sufficient taxable income to meet the tax threshold.
- Exemption from filing income taxes on Form W-4
- You are living and working in different states.
- There was a payroll error while calculating your salary and benefits.
1- You are considered self-employed.
If you are considered a contractor by the employer, your tax will not be withheld. However, if you are considered an independent contractor, there would be no income tax withheld from your paycheck.
Your employer would not withhold any tax at all. In other words, no withholding is applicable to self-employed personnel but, if you are considered an independent contractor, there would be no income tax withheld from your paycheck.
So this becomes the responsibility of the individual or self-employed. So, in this case,
- You are required to file Form 1099-MISC for wages reporting.
- Medicare and social security will be reported to the IRS by filing schedule SE. And you may be required to pay tax on it.
- To report income and any expense, there is a need to file schedule C. You will be required to pay tax on it depending on the overall tax conditions.
2) You do not earn sufficient taxable income.
Most of the tax systems in the world, including the United States, have a threshold to charge income tax. It means you only pay the taxes if you meet that specific threshold.
So, if your income is insufficient to meet the taxable income criteria, you will not be required to pay the taxes.
In addition, there are multiple factors to be considered to evaluate if you are required to pay the taxes. These factors include but are not limited to payment frequency, payment rate, the number of dollars for the dependents, and filing status.
However, it’s important to note that you’ll be required to file for taxes anyway, even if you do not need to pay income taxes.
This measure from IRS ensures that you remain on the tax net and do not find it difficult to pay taxes once you earn sufficient income.
Further, certain standard deductions are available to each of the taxpayers, and any of the taxpayers can claim these deductions.
The following amounts can be deducted from any of the taxpayers. That’s why it’s called standard deviation.
The deduction set by IRS for 2022 is as follows:
- $12,950 for a single filer
- $12,950 for married couples filing separately
- $19,400 for the head of households
- $25,900 for married couples filing jointly
- $25,900 for the surviving spouse
3) Exemption from filing income taxes on Form W-4
Exemption from paying taxes means that you are not required to pay taxes. The exemption can only be claimed if you fulfill certain requirements to get an exemption. If this is the case that you are exempt from federal taxes, you should mention it in Form W-4.
This form reflects the employee’s overall earning status and whether an employer should withhold their taxes or not.
4) You live and work in different states.
There is an increasing trend for remote working. So, if you work remotely, it can be a little complicated to determine your withholding tax status.
This means if you work in different states than the employer state, there are different regulations to be followed by the businesses. The situation becomes more complicated as different rules apply in the same situation.
For instance, if you are a resident of Alabama and your employer is from outside Alabama. an employer will not be required to withhold the tax. However, the same is not true for all the states.
5) There was some payroll error by the employer
There can be some errors while calculating an income tax. For instance, your income might not be correctly leading to an overall error for the withholding tax deduction. Sometimes, it also happens that your employer has deducted tax.
However, they did not provide you with a correct W-2 form. So, in this situation, you need to discuss the matter with your employer.
Income tax is deducted from your paycheck. However, if it’s the case that there has been no deduction from your paycheck. This can be due to an error or some legit reason.
The legit potential reasons include that your income was insufficient to withhold tax, and you are considered self-employed.
Further, the employer cannot withhold the tax, you are living and working in different states, or you are exempt from filing for the taxes.
So, if you do not see these potential reasons, there is a need to contact the employer and confirm if they have not made any of the errors while preparing the payroll.
The employer might have made some mistake in calculating the income tax liability for the year. Hence, if you find that income tax has been deducted from your paycheck, and there are no any of the discussed reasons, you should immediately contact the employer to make corrections.
Frequently asked questions
What is federal income tax?
In the United States, individuals and companies must pay federal taxes on the income earned throughout the year.
These earnings/income include but are not limited to salaries, cash gifts from employers, income on gambling, business, bonuses, and other forms.
Generally, the federal income tax is a big source of government income used to run the economy and overall institutions of the country.
Further, it’s an excellent tool for creating a balance of wealth distribution in the entire economy. For instance, higher tax amounts can be collected from the rich and low from the middle class. It helps to ensure financial equality in society.
Why do employers withhold taxes?
The employers must withhold taxes to ensure compliance with the state laws. If they do not withhold and submit taxes, they might face certain repercussions in the form of penalties. So, it’s a part of the system of taxation that speeds up the process of collection.
What is the W-2 form, and who is required to fill it out?
A W-2 form is used in the United States to collect information about wages and other compensation-related details.
However, this form only needs to be filled out if the employee has been working in the United States and the country’s land is used. Freelancing websites are also required to report freelancers’ wages to the IRS if work is done in the United States.
What is the W-4 form?
This form is used to collect tax-related information from the employees. It helps employers understand if they should withhold tax from an employee.
Further, the employer must get this form at the time of hiring. So they can understand their income status and correct deductions can be made.
In other words, this form helps an employer determine how much tax should be withheld from an employee’s paycheck.