Employers are supposed to withhold Social Security tax, Medicare tax and federal income tax from your pay. The Internal Revenue Service oversees the collection of these taxes. Failure to withhold can cause an employer to incur deposit penalties, interest and failure to file fees. However, the reasons no taxes are being withheld from your wages can vary.
Though exemption from Medicare and Social Security (FICA) taxes are uncommon, if it applies your employer will not withhold them from your paycheck. For example, you are exempt from both taxes if you work for a university, college or school at which you are also a student. Though federal income tax exemption is more common than FICA exemption, most employees are not exempt. For example, you are exempt from federal income tax in 2011 if in the past year you were entitled to all your federal income tax withheld because you owed no taxes and in the present year you expect a refund because you anticipate owing no taxes.
Your federal income tax withholding depends on your W-4 information and the IRS withholding tax tables (Circular E). You can claim allowances on your W-4 if you meet the requirements. Each allowance gives you a certain sum that reduces your taxable income. Further, claiming married or head of household puts you in a lower tax bracket than single. If you claim too many allowances on your W-4 or claim the wrong filing status, it can result in no federal tax being withheld from your wages. This can result in you owing the IRS when you file your tax return. In 2011, the IRS charges a failure to pay penalty of .5 percent of the unpaid tax up to 25 percent and interest of 3 percent.
If your employer neglects to withhold taxes from your paycheck, the IRS expects your employer to pay the amount due. Your employer should collect the under-withholding from you, but it still has to pay the IRS even if it has not finished collecting the balance from you. Your employer can incur deposit penalties, which depend on the lateness the deposit, a failure to file penalty of 5 percent of the unpaid tax up to 25 percent, a failure to pay penalty of .5 percent and interest of 3 percent to 5 percent for underpayments.
If you are not paying federal income tax because your W-4 is not properly adjusted, use the IRS online withholding calculator to help you determine if you should submit a new form to your employer. The calculator prevents you from underpaying or overpaying federal income tax. If your employer is neglecting to withhold federal taxes, speak with your employer and give him a chance to correct the error. If he refuses, contact the IRS. The agency will investigate the situation and conduct an audit if necessary. Intentional violation of withholding tax laws can result in the employer facing civil and criminal penalties.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.