The Internal Revenue Service expects to receive the money that you owe in taxes at regular intervals throughout the year. This requires your employer to withhold money from your paycheck. If you do not pay enough money to cover your tax liability throughout the year, you will need to pay that amount when you file your income tax return. Being under-withheld can put you in a financial bind at tax time and can also cost you in interest and penalties.
Your W-4 Form Is Incorrect
Your employer payroll department calculates the amount of tax to withhold based on the number of allowances that you claim on your form W-4. Each allowance that you claim reduces the dollar amount that your employer withholds in federal taxes by a certain amount, depending on your earnings for the pay period. If you claim too many allowances for your tax situation, you will be under-withholding. If you file your W-4 as married when you are single, you will not have sufficient income taxes withheld from your paycheck.
If you earn income from self-employment income or as an independent contractor in addition to your regular employment income, you may not have enough taxes withheld to cover your tax liability. Since your employer is not aware of this income, he cannot factor it in when calculating the correct amount of taxes to withhold from your paycheck.
Spouse's W-4 Incorrect
If you and your spouse work and you file a joint return, you must complete your W-4 form taking into account your spouse's W-4. You are allowed to claim one additional allowance on your own form if your spouse doesn't work. If your spouse gets a job during the year and you don't change your W-4, you could be under-withheld.
Complete a new W-4 with your employer if your tax situation changes during the year. If you get divorced or if you're no longer able to claim a dependent, you should complete a new form and give it to your payroll department. You may also want to review your total tax withheld early in the year with a tax professional and make any adjustments to your W-4 necessary to avoid surprises when you file. If you have significant non-withholding income, you may wish to make estimated tax payments to be sure you are not under-withheld.