My wife was told by her employer that her income is too low to withhold federal income tax. Please explain?

Question

The employer has been withholding tax for the past year. The last two paychecks had none withheld. The employer changed software that prepares the payrollrecently. Since the change, no taxes are being withheld. My wife pay rate did not change. Is this legal? Help!

Answer 1

Check to see if there an option that allows her to put a certain amount away each year? If not, she should do that herself in a separate account and not touch it until tax time.

Answer 2

I work for a payroll processing company and this situation happens frequently. The software companies like mine use to process payroll figure tax liability based on the annualized tables provided by the government in the Employer's Circular E. If the software determines that the employee has no tax liability, we do not withhold tax from the check. However, you are smarter than the software about your personal situation. If you want income tax withheld - fill out an adjusted W-4 for your wife's employer. There is a spot to have an additional amount of tax withheld each pay period. The software will add this additional amount ($5, $50, $100, whatever to the zero amount of calculated liability and withhold that). Our software also allows individuals to withhold at a flat percentage amount if they desire (this bypasses the government tables). You have options besides paying at the end of the year. Good luck. :)

Answer 3

First, yes, it is legal to have no tax witheld from your pay based on your income level. The tax witheld is based on a number of factors including the total income and the employee filing status and potential deductions. Conceivabley, a person could earn about $17,000 and have the status of married filing jointly and have only $100 of "taxable income" per year resulting in $10 of tax to be paid because the family receives a "standard deduction" of $10,300 and other exemptions (per person) of $6,600 ($3,300 per married person). If there are children, it increases the exemptions and there is also something called an earned income credit for lower income folks to help offset the expenses of having a child by getting a tax credit. I don't want to add to the complexity so I'll leave all that there.
Here's some bottom line thoughts:
1. If you are married, it's about the TOTAL income of the family, i.e. both you and your spouse
2. Then it's about the standard deductions and personal exemptions you are given which reduces your "income" by $10,300 + $3,300 per person in the household.
3. Just those two will significantly reduce the income you report for tax purposes.

Employers typically have software they use that is based on government standards to determine the minimum amount of tax that must be witheld. Depending on the size of the company, they could also just be using manual information the government provides.

NOTE: There is one potential trap you must avoid. If you are a double income family, i.e. you both work, it's VERY important to look at the TOTAL income of the family that will be received and then determine how much tax you'll likely have to pay. Sometimes, couples have a "primary breadwinner" and a second income such that the second income is maybe 25% or 50% of the primary income. For example, one spouse could be earning $25,000 and the second income is $15,000. ON THE SURFACE, the employer of the person making $15,000 looks at that and thinks there's no reason to withold federal tax. Problem is, the FAMILY income will be $35,000 at the end of the year. The Primary income will withold taxes based on $25,000 but with the second income, the actual "Taxable" income will be more even after deductions leaving a problem. I'm guessing that may be the concern here.

Two things to do:

First, go to the second link I reference. This is a standard tax calculator for the 2006 tax year using the 1040 EZ form. It uses only the standard deduction and exemptions. Choose Married Filing Jointly. Choose "No One Can Claim Me" which assumes you claim you and your spouse on your tax return. Assuming you are double income, put in your expected TOTAL income from both sources for the year where it says Wages, saleries, tips, etc. If you are not, just put in the income you expect to receive from the job you're talking about. Add in any other data that's there if you receive unemployment, etc. Then choose CALCULATE.
- This will tell you how much "taxable" income you would likely have to report to the IRS.

2. Take a recent paystub if you are double income from the job that is NOT in question. Look at the Federal Income Tax Witheld in your check to determine you're expected withholding for the year. This can be done by multiplying the witholding on your stub by the total number of times you'll be paid over the whole year, or looking at your total witheld to date for the year and then projecting that through the end of the year (If you had 1,000 withheld through end of June (the 6th month), you would take $1,000 / 6 ($167) and then multiple that by 12 ($2,004).
- Put that amount into the field on the form that says Federal Income Tax witheld. Hit calculate and you'll have a good estimate of what the end of the year looks like. If you are overpaid by withholding just one paycheck then you don't need to withold on the other. If, however, you are not, then you need to go back to the employer and have them withhold tax either by the normal approach or by specifying a dollar amount per pay period that will get you where you need to be.

Hope that helps.

Answer 4

He might have been withholding too much in the previous months therefore he is compensating be not withholding any. Or, in fact her income might be too low for the software to recognize that she owes any. That is doubtful though. Usually, they always withhold a little and then you get a refund at the end of the year.

If your wife is a waitress then it is posssible that her income without tips is even too low to take taxes out. But, if she is working any other job where they pay the regular minimum wage then she should have to pay a little something.

Answer 5

I had this experience when I only made $7.00 an hour and worked only like 20 hours a week. There is a cut off where the government will not withhold taxes if the amount is so minimal. Go to IRS.gov and see what those cut offs are. The employer is responsible for withholdings so I am sure it is legitimate on their end but never hurts to make sure.

Answer 6

Assuming her employer is correct, she may need to adjust her W-4 to correct the problem. She could claim Married, but withhold at single rates and claim zero deductions. This will allow the employer to withhold more taxes if she makes enough. If its still not enough, then she can elect to have a certain dollar amount withheld on her W-4.

But if you want to see if her employer is correct, review Publication 15. The information that you need begins on page 34. Here is a link.

http://www.irs.gov/pub/irs-pdf/p15.pdf

Answer 7

It is up to your wife if she wants income withheld.
The amount of total household income and the amount of dependants dictates this.
The employer must withhold income taxes even for part timers. If the taxes are overpaid then refunds will; be issued or she may be eligable for earned income credit which is extra money at the end of the year. He may not be filing and if so that is against the law. Social security must be deducted and he must contribute half.
Find out if he is taking out any deductions.

Answer 8

Don't worry about it you will not get into any trouble because of the employers tax records. The only thing that may happen is that at the end of the year you may have to pay a little more to pay back any owed taxes. Best wishes

Answer 9

She needs to confront her employer again and ask them to clarify why taxes are not being withheld from her check. Not only could you get a big surprise when you go to file your taxes for the next year, but the employer could get into trouble for not taking taxes out of their employees checks!

Answer 10

shes a lied and trying to avoid paying the employers part of federal and state taxes!