Can I Ask My Employer Not to Withhold Taxes?

You can technically ask your employer not to withhold taxes, but there are only a few situations where it’s a good idea.

How much is an employer supposed to withhold in taxes?

An employer is supposed to withhold enough in taxes to make sure that your taxes from that job are covered. However, it’s up to the employee to provide the correct information via Form W-4.

Because of our tax laws, everyone’s taxes are different. Your taxes depend on things like your family size, your marital status, whether your spouse works, and whether you have other sources of income.

The only way an employer knows how much to withhold in taxes is by asking you to fill out Form W-4. Normally, your employer uses your W-4 as you submit it. Employers have very little responsibility to verify what’s on your W-4 as long as it seems reasonable.

What tax withholding should you choose?

IRS Form W-4 is designed so that it will normally get your tax withholding right as long as you answer the questions correctly.

You normally don’t have to do any math to figure out a percent in tax or dollar amount in taxes. Just answer the questions, and your employer’s payroll system will calculate your taxes based on what you said.

Sometimes, you might want to add more withholding. A common example is when you have a 1099 side gig that doesn’t take out taxes.

If you report that side gig on your employer’s W-4, your employer will withhold a higher tax rate on your W-2 income but won’t withhold taxes to cover the taxes on your side gig. For your side gig, you’ll either need to make estimated tax payments or ask your employer to withhold an extra amount to cover the side gig taxes.

Can I set my tax withholding to $0?

When you fill out your W-4 to set your tax withholding, the IRS expects you to do it accurately. It’s technically possible to claim that you’re exempt from withholding or to add extra deductions to reduce your withholding.

However, you’re normally only supposed to use exempt from withholding when you had no tax liability last year and don’t expect any tax liability this year. That’s usually when you only work part-time and won’t make enough to pay taxes.

Another situation where you might want to reduce your withholding is when your income falls during the year. If your withholding early in the year was based on a higher expected income, you might have already had enough taxes withheld for the year. If you can’t wait to get your tax refund, you may want to set your withholding for the rest of the year so you’ll owe $0 and get a $0 refund.

One thing you can’t do is not have taxes taken out and then pay all of your taxes on April 15th.

What happens if you don’t have enough taxes taken out?

Even though you file taxes on April 15th, you’re supposed to pay taxes as you earn money. Since withholding is an estimate, it’s OK when you owe a little at tax time.

However, if your withholding is too low because you asked your employer not to take taxes out or didn’t fill out a correct W-4, two things could happen. First, you might get fined by the IRS for not paying enough in taxes during the year.

Second, the IRS might issue a lock-in letter. A lock-in letter tells your employer to set your income tax withholding higher. It also tells your employer not to let you change your tax withholding unless the IRS says it’s OK.

A lock-in letter reduces your flexibility since you can’t change your withholding unless you contact the IRS and prove the withholding rate they chose for you is incorrect. Lock-in letters usually last for at least three years and possibly longer if you continue to have problems with not paying enough in taxes.