In the case you recently checked your paycheck and noticed that no federal taxes were withheld, it is natural to wonder the reason. This situation seems unusual at first. Yet, there are certain reasons why federal income tax might not be deducted from the earnings.
Possible Reasons for No Federal Tax Withholding
There are common explanations for why the paycheck may not have federal taxes deducted as outlined below:
- Low Taxable Income: If the total earnings fall below the federal income tax threshold, the IRS does not require withholding. This situation is usually applicable to part-time workers, students and employees with lower annual wages.
- Filing Exempt on Form W-4: When an individual starts a job, Form W-4 is completed to determine tax withholding. If "exempt" status is claimed on this form, the employer will not withhold federal income tax. Yet, Social Security and Medicare (FICA) taxes will still be deducted.
- Excessive Tax Deductions and Credits: Large deductions like retirement contributions or pre-tax benefits (health insurance, HSA contributions) might lower taxable income enough to eliminate federal tax withholding.
- Multiple Jobs or Spousal Income: If the individual has multiple jobs or files jointly with a spouse who has a higher income, the primary employer may not withhold federal taxes. Instead, the tax liability might be covered by the withholding from other income sources.
- Incorrect W-4 Information: If Form W-4 is completed incorrectly, the employer might not be withholding enough (or any) federal taxes. This situation could result in a tax bill at the end of the year.
What Should You Do If No Federal Taxes Are Withheld?
If you suspect that the paycheck should have federal tax withheld, the following actions can be taken:
- Review the W-4 Form: The information submitted to the employer should be checked. If necessary, it can be updated to withhold the correct amount.
- Estimate the Tax Liability: An IRS tax withholding calculator can be leveraged to see if adjustments are needed.
- Monitor Yearly Earnings: If it is expected to earn more over the year, withholdings can be adjusted to prevent a surprise tax bill.
Conclusion
It might be concerning to see no federal taxes are withheld from the paycheck. Yet, it is not always an error. If you expect to owe certain federal taxes by the year-end, adjusting the withholding can prevent unexpected tax payments.
Need help with payroll tax planning? Watter CPA is ready to assist with payroll tax compliance—contact us today for expert guidance!
