My employer did not take out federal taxes

Employee income tax is based on how much income an individual earns. Income tax is one of the most common forms of taxation around the globe. Most income tax systems are structured as a regressive tax, meaning that those with higher incomes pay a higher percentage, and those with lower incomes pay less. In the United States, IRS regulations define income tax as a "pay as you go" tax.

Taxes you are expected to owe the IRS are deducted from every paycheck rather than being paid in a lump sum at the end of the year. There are, however, a number of exceptions to the pay-as-you-go rule. If your employer didn't take out federal taxes from your paycheck, you could end up owing a big lump of money to the IRS when you file your taxes. Some employees avoid this situation by paying quarterly estimated taxes throughout the year.

Tax Withholding and Exemptions

Employers are generally required to withhold income taxes from their employees' pay. However, employees do have some control over the amount of income tax withheld given that you choose the number of exemptions you claim on your W-2 form. If you claim all of your exemptions, then the minimum amount of income tax is withheld. But if you are eligible for three exemptions, but only claim zero or one, then a greater percentage is withheld for taxes.

Claiming all of your exemptions leads to bigger paychecks. However, the risk of not claiming exemptions is that you might owe additional income tax depending on your financial circumstances. Not claiming all of your exemptions means you are more likely to receive an income tax refund as you have in effect overpaid throughout the year.

According to H & R Block, some employees are exempt from federal tax witholding if they meet certain criteria established by the IRS. Specifically, they must have no past or anticipated tax burden. For example, if no federal taxes were taken out of the paycheck in 2020 because the employee already had an exemption, or owed no taxes the previous tax year and expects a similar situation in 2021, that employee may be exempt from federal withholding in the current tax year.

Independent Contractors

Independent contractors have different tax forms than the standard W-2 Wage and Tax Statement. They are basically running their own businesses even if they have not legally formalized the arrangement, so the IRS considers monies paid to independent contractors to be more like business income. Therefore, income taxes are generally not withheld from payments.

Independent contractors do have to pay income taxes, but only on the amount after business expenses have been deducted. In most cases, independent contractors pay income taxes on a quarterly basis (estimated taxes) using IRS Form 1040-ES. Employers are required to report to the IRS if they pay an independent contractor ​$600​ or more per year, even if they do not withhold taxes. Independent contractors can also get hit with an underpayment penalty if they don't pay quarterly, according to Finance.

Backup Withholding

The IRS requires employers to withhold taxes for employees and independent contractors who do not supply a taxpayer identification number or who supply an incorrect taxpayer identification number. This is called "backup withholding." The withholding percentage was a flat rate of 24 percent, according to IRS Topic No. 307 withholding instructions issued in 2021. Backup withholding might also apply to individuals who owe past taxes.

Exception for Domestic or Household Employees

IRS Publication 926 specifies an exception that employers do not have to withhold income taxes from the pay of domestic or household employees. However, depending on the circumstances, you may be responsible for paying Social Security, Medicare and/or unemployment taxes. Employers may withhold income taxes if the household employee requests that they do so.

When you work as an employee, your employer is responsible for withholding the proper amount of taxes from each paycheck and sending that money to the IRS. If you find that your boss is not withholding federal income taxes, it is your responsibility to contact your employer for an explanation. If your employer does not withhold taxes, you must still make those payments to the IRS.

Check Your Pay Stub

You should always check your pay stub carefully, whether or not you suspect a problem. Every time you get paid, take a few minutes to look at the accompanying pay stub. Find the amount of your gross pay, as well as the amount of federal, state and local income taxes withheld.

This number should be fairly consistent if you earn roughly the same amount each pay period. If you notice a dramatic increase in your take-home pay, that could be a sign that your tax withholding is too low.

Contact Your Employer

If you do find a problem with your tax withholding, you should contact your employer right away. If you spot the problem quickly, the employer can adjust the amount of your withholding to make up for any missed payments. But if you let it go too long, it could be difficult to make up that money, and you could end up owing a lot of money to the government.

Independent Contractor Tax Responsibilities

If the company you work for classifies your job as that of an independent contractor, it is not required to withhold any taxes from the payments it gives you. As an independent contractor, you are responsible for paying the taxes you owe, generally by making estimated quarterly payments to the Internal Revenue Service and your state revenue department.

If you are classified as an independent contractor, it is a good idea to consult with a tax planner or CPA to plan your tax strategy.

Estimated Payments or Quarterlies

You are responsible for paying the federal income taxes you owe, even if your employer fails to withhold those taxes from your paycheck. If you find that your employer is not withholding federal taxes, consider making quarterly estimated tax payments based on what you expect to owe. You can use a commercial tax preparation software package to make those payments to the IRS. If you wait until tax time to pay the taxes you owe, you will face penalties for underpayment.

If you use a software program such as Turbo Tax, you'll have access to questions and answers on how to make estimated payments. You can make an account on the IRS website to pay your quarterly estimated tax payments. The site also offers calculators to help figure out how much you owe each quarter.

Remember the quarterly payment schedule is April, June, September, and then January for end of year income. The IRS form 1040-ES is extremely helpful with information on paying estimated taxes.