This is a situation thousands of taxpayers find themselves in every year. Although they’re certain they filled out their tax paperwork correctly, they run their W-2 numbers and find out they owe the IRS hundreds or thousands of dollars. This is incredibly frustrating, especially when many Americans simply do not have the extra money to cover a surprise tax bill.
However, even though the mistake may be your employer’s, you are ultimately responsible for paying the correct amount of income tax. If you’re facing an unexpected tax bill and you’re not sure how to avoid IRS collection actions, don’t panic. This is common, and you have options. Call Seattle Legal Services, PLLC at 425-428-5262 to set up a consultation now.
Key Takeaways
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- No matter who is responsible for the error, the IRS holds the taxpayer responsible for their income tax.
- Under-withholding is often the result of W-4 errors, life changes, job changes, and irregular pay.
- Installment agreements, hardship status, and offers in compromise may be available to taxpayers who cannot pay in full.
- By updating your W-4 after major life changes, you can help prevent future under-withholding.
Why This Happens: Common Reasons For Inaccurate Withholding
There are several reasons that withholding errors happen. Some are an employer’s fault, some are the taxpayer’s fault, and some are just a natural result of life happening and paperwork not quite keeping up.
Incorrect Information on W-4
Your employer determines your withholdings based on the information you provide on Form W-4. This is what determines how much is withheld in tax every paycheck. If you provide the incorrect information, your withholdings may be incorrect, and you can end up owing the IRS a lot of money or receiving a large refund. Errors include choosing the wrong filing status, claiming the wrong amount of dependents or deductions, marking yourself exempt even though you are not, and not updating your W-4 after a relevant life change.
Employer or Payroll Department Error
Perhaps your W-4 is correct, but an error happened on your employer’s side. They may have entered your filing status incorrectly, suffered a payroll software glitch that reduced your withholding, failed to file your new W-4 after a life change, or switched to a payroll provider that mishandled your withholdings. There are safeguards in place to prevent payroll software errors, but these programs aren’t infallible, and mistakes do happen.
Didn’t Update W-4 After Life Changes
Updating your W-4 after a major life change is critical, but it’s very common to forget until you realize that your taxes are off. When a child becomes too old for the child tax credit, a couple divorces or separates, a couple gets married, a dependent moves out, or you pick up a second job that your W-4 doesn’t account for, your income or deductions may change enough to warrant a new W-4.
New Job or Job Changes
When you change jobs during the year, withholding problems are common. You may fill out your W-4 like you always have, not realizing that your withholdings were different at your old job. You may have even forgotten to submit a new W-4 or to adjust your withholdings to account for your new income. Each employer treats your income as if it were your only source of income, so your withholdings may be inaccurate across the board when you have multiple employers in one year.
Bonuses, Commissions, and Irregular Pay
Employers typically withhold a set percentage from your bonuses. However, the amount withheld may not reflect your actual tax bracket, resulting in a significant underpayment at the end of the year. If bonuses, commissions, or overtime make up a significant part of your salary, you may want to adjust your withholdings throughout the year to account for your tax liability.
Who’s Responsible For the Unpaid Tax?
When there’s an issue with tax withholdings, the IRS holds the taxpayer responsible, not their employer. Even if the employer caused the problem by entering your W-4 incorrectly or withholding the incorrect amount, your income tax is still your responsibility. What is withheld from your paycheck is just an estimate of what you expect to owe; if you owe more at the end, it still falls on you.
The only exception is when your employer doesn’t withhold or remit the taxes they are responsible for, such as Social Security and Medicare taxes. In that case, the IRS holds them responsible.
Essentially, the IRS views it as if you’ve lost nothing due to the incorrect withholding. If you’d had the withholdings correct, you would have had less in your paycheck throughout the year. But because of the lower withholding, you received extra take-home pay each paycheck, so you ended up with the money you should have received.
What You Can Do If You Now Owe the IRS Money
You’ve realized your withholdings are incorrect, and you owe the IRS money. While this isn’t an ideal situation, it is one you can address and fix. We recommend:
- Filing your return on time: Even if you cannot pay in full, file on time. The failure-to-file penalty is significantly higher than the failure-to-pay penalty, and when you file on time, you can save yourself a significant amount of money.
- Consider a payment plan: If you can pay within 180 days, a short-term payment plan is a great option for you. If you need more time, a simple payment plan allows you to extend payments until the end of the collection period.
- Look into hardship status: Currently not collectible status is reserved for those facing significant financial hardship that leaves them unable to pay their tax debt. It’s rare for someone with a steady income to qualify, so it may not be an option for you. However, it is worth discussing with a tax attorney if the amount you owe is unreasonable.
- Look into an offer in compromise: Again, an offer in compromise isn’t always available to those with a steady income, especially if you only have one year’s worth of tax debt. But if you do qualify, you may be able to settle what you owe for less.
- Request penalty abatement: Penalty abatement can remove penalties from your tax bill, giving you a big break on what you end up paying. First-time abatement is available for those who have a history of tax compliance, and reasonable cause abatement is accessible to those who have a valid reason for being late.
Solutions for Common Scenarios
| Scenario | Who is responsible? | Best fix |
| Employee filled out W-4 incorrectly | Employee | Submit updated W-4 and set up payment plan for the current amount owed |
| Employer entered W-4 incorrectly | Employer is responsible for error, but employee is responsible for paying the taxes | Update your W-4 and adjust your withholdings; check taxes paid partway through the year to ensure there have been no further errors |
| Life change not reported | Employee | Update W-4 after major life events |
| Job change or multiple jobs held | Employee | Adjust W-4 to account for all sources of income |
| Bonus or extra pay | Employee | Change W-4 to have more withheld |
What If Your W-2 Doesn’t Match What Was Actually Withheld?
Sometimes, it’s not a W-4 error, but a mismatch between your paperwork and what was withheld. If your employer withheld more or less than what was reported on your W-2, that may render your entire tax return inaccurate.
When this happens, you need a corrected W-2 (also known as Form W-2c). You should immediately contact your HR or payroll department with evidence of the mismatch and request a W-2c. Get written confirmation that they will file their corrected form with the IRS.
In the meantime, pay your current tax bill to keep interest and penalties from accruing. Once the W-2c is issued, you can amend your return if the new W-2c changes what you owe.
How to Prevent This Issue Next Year
You may not be able to fix last year’s under-withheld taxes, but you can set yourself up for proper withholding moving forward. We recommend:
- Updating your W-4 after every job change or major life change
- Use the IRS Withholding Estimator mid-year to ensure that you are on track to not owe the IRS any money
- Review each paystub to ensure that the proper amount is being withheld
Should You Contact a Tax Attorney or Tax Professional?
You don’t always need a tax professional for withholding issues, especially if you just have one year of under-withholding issues, and you can set up a payment plan without additional assistance. But if you:
- Have multiple years of returns you need fixed
- Want to request penalty abatement and aren’t sure how to prove your case
- Need assistance with a payment plan
- Have other tax debts, levies, and unfiled returns
- Have an employer who refuses to correct your W-2
A tax professional can handle communication with the IRS on your behalf, request penalty abatement, negotiate a fair and realistic payment plan, ensure that you are set up for proper withholding next year, and advocate for you if your current tax issue intersects with other tax problems.
At Seattle Legal Services, we understand the difficulties that come with under-withheld taxes. One surprise tax bill is often enough to completely throw a family’s finances off for months on end. Call us at 425-428-5262 or reach out online to schedule a consultation.
Frequently Asked Questions
Can I make my employer pay the taxes they failed to withhold?
No. The IRS still holds you responsible for the income tax owed, as you received extra money throughout the year due to the under-withholding.
Will the IRS remove penalties if my employer made the mistake?
They may. You may qualify for first-time penalty abatement or reasonable cause penalty abatement. This does not eliminate the actual tax owed, though.
How do I check if my withholding is correct now?
Check your most recent paystub and enter the numbers into the IRS Withholding Estimator to figure out if you’re on track to pay what you owe by the end of the year. If not, adjust your withholdings.
What if I have two jobs and neither withheld enough tax?
This is common for people who have two jobs. You may need to adjust your W-4 and request additional withholdings at both jobs.
I updated my W-4, but I’m still under-withholding. What can I do?
You can request that a set additional amount be paid to the IRS each paycheck, increase withholding allowances, change your filing status on the W-4, and look into other side income sources that may require estimated payments. This is a situation where we recommend talking to a tax professional.
Sources:
https://www.irs.gov/individuals/tax-withholding-estimator
https://www.irs.gov/individuals/employees/tax-withholding
https://www.irs.gov/businesses/small-businesses-self-employed/correcting-employment-taxes