Why Isn't Federal Income Tax Being Withheld from My Employees’ Paychecks?

With tax season fully upon us, a common question we are getting from our clients is about their employees’ reporting back to them that they aren’t having federal income tax withheld from their paychecks. 

There are a couple of reasons why this may be happening, and there is a way to fix it before you start to worry that you made a major tax mistake.

They Don’t Earn Enough Income to be Taxable

The most common reason for you or your employee not seeing any paycheck tax withholdings is that they simply didn’t earn enough income. 

A federal income tax withholding is a portion of an employee's paycheck withheld to cover their federal income tax obligations. A number of factors can affect this amount, such as an employee's filing status (whether they are married or single), the number of dependents claimed, and any additional withholding requests the employee makes.

Income Level

If you or your employee don’t have any paycheck tax withholdings, then most likely you don’t make enough to have income tax withheld. Not everyone who earns an income is eligible for federal tax withholding. Income levels play a significant role in determining how much and if you are even eligible for federal tax withholding.

Not meeting the income requirement for withholdings is typically an individual who works very part-time or has a side business that brings in earnings below the income threshold. This does not mean the individual is exempt from paying taxes; they are just responsible for paying the entire amount owed when they file their taxes. 

If you want to check if the reason you're not having income taxes withheld is because you don’t earn enough, you can verify this using the income threshold in IRS Publication 15-T. This table shows how much federal income tax will be withheld depending on your wage bracket, and you can use this as a guide to determine your own situation.

In addition to the Federal wage table, each state also has a wage table of their own. For instance, if you live in the state of New York, the NY State version of this is the NYS-50-T-NYS. This table will show you the wage brackets and tax withholding practices, specifically in New York. It is important to remember that the stage wage table is in addition to the federal table, and does not replace or supercede it.

They Claim the Maximum Number of Dependents

The other main factor affecting federal income tax withholdings is how you fill out your W-4 dependents claim. Your tax withholdings are determined by how many dependents you claim, not the amount you earn (considering it’s above the minimum amount).

If you claimed the maximum number of dependents allowed, this means a lot more money in your paycheck but less money withheld for taxes.

This doesn't mean that you are completely exempt from paying federal income taxes, however. Even if you haven’t been paying income taxes throughout the year because of how many dependents you claimed, you may still owe income taxes. If so, it will need to be paid as a lump sum when you file your taxes or prior to the tax deadline, instead of smaller amounts withheld from your paycheck. 

If you don't like this method of paying income taxes in a lump sum, you can change your W-4 dependents claim. Even if you have several dependents, you don't actually have to claim them all. However, make sure that you never claim more dependents than what you have, as falsifying this information can lead to legal issues with the IRS.

How to Adjust Your W-4 Withholdings

You should always review your W-4 to make sure it is updated and accurate, ensuring that you are claiming the correct amount of dependents and guaranteeing enough federal income tax is withheld throughout the year so you don’t have to pay it all in at once to the IRS. 

If you notice that no federal taxes are being withheld from your paychecks throughout the year, you probably want to consult a tax professional and talk to your employer about adjusting your W-4 form. You will still have to pay taxes on previous earnings that were not taxed properly.

The best way to adjust your W-4 form is by asking your employer for a new one, refilling it out, making the necessary tax withholding adjustments with the help of your tax professional, and resubmitting it to your company for them to have on file. If you need to make adjustments, make sure to do this as soon as possible and before the end of the current year.

It's important that you understand or seek help when filling out your tax documents to ensure accuracy and legal compliance. You always want to make sure that you minimize and eliminate any tax mistakes before they've already been reported to the IRS. The last thing you want is to be fined or have to pay extra because your tax documents weren’t accurate.

Also, it's common for tax rates and processes to change yearly, so always make sure that you are up to date on all the tax rates and rules for the current tax year. This is where having a trusted payroll provider can be crucial to your business. 

Ensure Accurate Tax Withholding 

Luckily, the W-4 is a very amendable document. So if you or your employees believe that the reason you are not seeing Federal Income Tax withheld is because you have too many dependents claimed on your W-4, you may change your W-4 at any time. Simply resubmit a new W-4 to your employer, with the revised amount of deductions, and the change will take effect with your next pay period. 

The IRS has a handy, free tool on their website to help your employees estimate their W-4 withholdings. Visit irs.gov/individuals/tax-withholding-estimator to access it.

It’s important that your taxes are withheld and processed correctly throughout the year. If you have any questions or concerns about your taxes or income withholdings, we recommend that you consult a CPA or tax professional for further guidance.