Is it legal to backload federal tax withheld?

Question

For example, if you estimate you'll owe $5000 at year's end, can you legally have $0 withheld for the first 21 paychecks (assuming bi-weekly pay dates) and then change your W4 to $1000 withheld for the last 5?

Answer 1

Yes, it is legal. However, if you had a balance due in the prior year of greater than $1,000, the IRS will impose an underpayment penalty on you for not making quarterly estimated payments during the year. And I quote from http://www.irs.gov/pub/irs-pdf/i2210.pdf on page 1:

"The (underpayment) penalty is figured seperately for each (quarterly) installment date, therefore you may owe the penalty for an earlier due date even if you paid enough tax later to make up for the underpayment."

However, if you had a refund or a balance due of less than $1,000 in the prior year, this won't apply, and you can backload all you want. The reason? The IRS will just be looking at the end result of your W-2 and not the month to month payments of your employer.

Answer 2

Pay withheld from wages is considered to be evenly paid over all the year. However, you cannot exempt yourself from withholding if you owe.

So, you could pay less, but not zero, at the beginning of the year and make up the shortfall toward the end of the year.

Answer 3

Not legally, but it would probably slip by unnoticed.