What is Underwithholding?
Underwithholding is when you haven’t had enough income taxes withheld during a year. If a tax payer’s incomes taxes are underwithheld, it does not mean that tax payers doesn’t have to pay the taxes. Tax payers pay the underwithheld taxes when he or she files a tax return.
The withholding amount is determined by how many credits you claim on your W-4. Claiming too many credits is what causes underwithholding.
Underwithholding isn’t necessarily a bad thing. Some people prefer to have more money now and pay their taxes later. In that case, underwithholding could be a good thing. However, if you know you are underwithholding, then it’s smart to set some money aside to pay taxes. If you underwithhold by mistake, you would need to pay the government those taxes. If you can’t pay your taxes all at once, you can set up a payment plan with the Internal Revenue Service (IRS) to make your payments slowly.
A mid-sized company employs Bill Jones. When Bill was hired he filled out a W-4 form and claimed as many credits as he could in order to lower his taxes. This worked really well for Bill because he had more income coming in. However, when he began filing his tax return in March, he realized that he hadn’t paid enough in taxes. Because he took so many credits his employer had underwithheld his income taxes.
Bill ended up having to pay taxes with his tax return. He decided to change the number of credits he was claiming so that he wouldn’t have to pay taxes with his return again next year. Instead of claiming as much as he could, Bill decided to only claim 2 credits. Bill won’t know if he withheld enough taxes until next year when he files his tax return.