Black ceramic mug beside tax withholding form
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This Is Why Your Federal Withholding Is So Low

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Feb. 1 2022, Published 4:57 a.m. ET

There could be serious repercussions if your tax withholding is too low, and you may be charged an underpayment penalty fee. Some employees realize closer to filing their return that their employer's withheld amount is minimal. Why is your federal withholding so low?

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The U.S. tax system is pay-as-you-go, meaning that you pay your taxes as you earn rather than waiting until you file your taxes and paying a lump sum. It's important to withhold the right amount to avoid a nasty surprise at tax time. For salaried employees, their employer usually withholds taxes.

Why is your federal tax withholding so low?

The amount withheld is based on several factors, including:

  • The amount you earn.
  • The information you gave on your Form W-4, including your filing status, number of withholding allowances claimed, and additional withholding.
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When less federal tax might be withheld

Incorrect W-4 allowances

An employee can claim a number of allowances, and the more claimed, the less tax withheld. For example, if you forgot to updated your W-4 to claim that your children aren't dependent anymore, your employer would withhold less tax than required.

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Multiple jobs

If you hold several jobs and have claimed exemptions on all of your W-4s, your withholding tax could be lower. In such cases, you should use the Two-Earners/Multiple Jobs Worksheet to figure your allowances, and claim only the allowances on the W-4 for your highest paying job.

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Other income

There are other sources of income, such as the sale of stock, interest received, or cash received by working as an independent contractor, that employers aren't liable to withhold taxes for. These, however, are part of taxable income, and could result in not enough tax being withheld.

How to correct the withholding tax issue

One way to ensure a correct amount is being withheld is to start early in the year and to check again if any tax law changes. or your W-4 information needs to be updated. Life events that may call for a W-4 update include the following:

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  • Lifestyle: Marriage, divorce, birth or adoption of a child, home purchase, retirement, or filing chapter 11 bankruptcy.
  • Wage income: You or your spouse starts or stops working or starts or stops a second job.
  • Taxable income not subject to withholding: Interest, dividends, capital gains, self-employment and gig economy income, or IRA distributions. You can ask your employer to set aside additional withholding tax to cover these taxes.
  • Itemized deductions or tax credits: Medical expenses, taxes, interest expense, gifts to charity, dependent care expenses, education credits, child tax credits, or earned income tax credits.

How can you check the tax withholding amount?

To determine whether you need to give your employer a new Form W-4, you can use the Tax Withholding Estimator on IRS.gov. You can also use the instructions in Publication 505, Tax Withholding and Estimated Tax, especially for more complex situations such as having alternative minimum tax or tax on unearned income from dependents.

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