No Federal Tax Withholding

Q. My employer did not withhold any federal or state tax last year, just Social Security and Medicare. What do I do?

A. This is really a serious problem. However, the number of ways you could get into this problem are many. First lets tackle the federal issue. Check with your employer to see what the W-4 says that they have on file for you. Did you submit a Form W-4 to your employer that was marked as “exempt”. If so, you basically told them not to withhold. Does your Form W-4 have a high number of allowances compared to your taxable income? This could result in no withholding as the withholding formula would return zero for your situation. If the employer actually made a mistake, and you end up with interest and penalties for not withholding throughout the year, maybe they will make it right by paying those for you.

Now for the state question. Again, look at the state version of the W-4. The same questions as above apply, except for one. Does your employer have a business presence in the state where you live. Especially in east coast states, there is a funny concept called reciprocity at work. If you live in one state and work in certain others, your employer may need to withhhold for your residence rather than work state. If you employer has no physical presence there (known as nexus), they are under no obligation to withhold. You would need to check with your payroll department on this one. It’s too complex for this blog to get into the whole issue of nexus.

Lastly, if your paystub showed no withholding for the entire year, why did you wait to say something? Everyone should check their paystub at each pay period to make sure everything makes sense. If something looks wrong, check with your payroll representative for an explanation. The sooner you catch the problem, the easier and less expensive the solution will be.

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