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The first time you look at your pay stub and realize that your employer isn’t withholding federal and state income taxes from your paycheck, it might seem like a tiny windfall. While it may mean more pocket cash in the short term, the mistake in withholding may come around to haunt you when it’s time to file. Citizens must pay income taxes on all money they earn through active employment.
W-4 and Payroll Withholding
First, make sure your employer has the correct information about your tax withholding situation. You may have incorrectly filled out a Form W-4 when you began employment and claimed exemption from payroll tax withholdings on the form, or payroll staff may have erred when calculating your withholding amounts. Submit a new W-4 with updated information, or speak with your employer to be sure you provided the correct withholding information.
Employee or Independent Contractor?
Confirm that your employer correctly classified your worker status. If you’re classified as an independent contractor, your employer pays you as if you were another business, and doesn’t withhold payroll taxes. The Internal Revenue Service requires companies to classify workers as employees if the companies dictate the time and manner in which the work needs to be done, if they provide materials or tools to do the work, or if the relationship is an ongoing, open-ended one. Companies may hire independent contractors rather than employees to save on payroll withholding taxes, although it makes you liable for those additional taxes -- in the form of "self-employment taxes" -- in the process. If you believe your employer misclassified you as an independent contractor, you may submit a Form SS-8 to challenge your classification.
Income Taxes and Interest
If you continue to work without alerting your employer to the lack of payroll taxes withheld from your check, you may face a tax bill when you file. While some workers -- students, part-time workers, those who qualify for child-care and other credits -- may not owe income taxes, many workers who don't have any taxes withheld should brace for a hefty tax bill. The IRS requires workers to pay income taxes on all money they earn as they earn it, and it charges interest on the amount of income taxes that were underpaid through the year if your tax bill is $1,000 or more for the year.
Estimated Tax Payments
If you’re self-employed or your employer hasn’t withheld the appropriate taxes from your check, you can make quarterly estimated tax payments to avoid interest and penalties. As the name implies, estimate tax payments are based on the amount of tax you expect to owe. Estimated taxes may include income and payroll tax withholding, if you’re an employee, or the self-employment tax if you’re an independent contractor. Calculate your estimated tax using worksheets included on Form 1040-ES. Estimated tax payments are due April 15, June 15, September 15 and January 15.
- Pay Stub image by Haris Rauf from Fotolia.com