What happens if i dont withhold taxes

As noted above, you can claim an exemption from federal withholdings if you expect a refund of all federal income tax withheld because you expect to have no tax liability and had no tax liability in the previous tax year. To claim an exemption, you must complete only lines 1, 2, 3, 4, and 7 and sign the form to validate it.

Writing this will guarantee that withholdings are not taken from your future paychecks. Do not complete any other steps on Form W If you claim an exemption from withholding, you will need to submit a new Form W-4 by February 16, Improperly claiming exempt from federal tax withholding can have major consequences.

So, as you complete your Form W-4, make sure to do it with care — and be sure about if you can file a W-4 claiming exempt status. For personalized assistance, find a tax office nearest you! Did you receive a penalty for not filing the correct information returns? Does your business have delinquent unfiled returns? The IRS has determined that your records are inadequate. Thus, tax withholding is said to be convenient for taxpayers because it allows them to make small, seemingly affordable payments throughout the year.

Some people, however, might say it's paternalistic of the government to decide when and how you'll pay your taxes instead of allowing you to make the payments yourself. Despite tax withholding, some people are still caught off guard in April. Because of the aforementioned savings dilemma, withholding makes it more likely that the government will receive all the taxes it is due.

Withholding also makes it more difficult for tax protesters and tax evaders to keep their money out of the IRS 's hands. Since most people have all or most of their taxes remitted to the government by their employers, the IRS theoretically has a smaller pool of people to go after for unpaid or underpaid taxes.

Lucky you - this means that fewer of your tax dollars are needed to fund the IRS's collection efforts. If this point is truly a rationale for withholding, it would seem that government is admitting that its own employees aren't very good at managing the budgets for their programs, either.

If they were, it wouldn't matter if programs were funded in a lump sum in April or with steady payments all year long. An employee who starts a new job must fill out IRS Form W-4 , which the employer typically provides in order to elect the amount of tax withholding from their paychecks. The tax withholding system is something that most of us take for granted, but the concerned citizens, politicians and economists who have analyzed it have many criticisms of the system.

If taxpayers had to make one large payment, they would know exactly how much they were forking over for federal taxes, Social Security taxes , Medicare taxes and state taxes. Since the money is taken gradually, many people never pay attention to the full amount, which makes it easier for high tax rates to persist and for the government to increase tax rates.

For example, the state of California in decided to use the tax withholding system to take a large, interest-free loan from its taxpayers. The government says it will refund the borrowed money in April. As we all know, the government has a knack for not only spending every single tax dollar it collects, but for running large budget deficits. To continue the previous argument, critics say that when taxpayers don't realize how much of their income is going to the government, they aren't likely to make the connection between their income and the money that is needed to fund new government programs and expand existing ones.

Thus, they are likely to support ever-bigger programs without understanding that they're also supporting higher taxes. They don't realize the money was theirs all along and that they've made an interest-free loan to the government all year. A tax refund isn't really a windfall - it's money that you earned that you should have had access to during the year. But when it arrives in a lump sum in the form of a tax refund, it seems like a good excuse to do some extra spending.

It's possible to adjust your withholding so you don't receive a large refund. You can use the extra money in each paycheck to help meet your savings goals throughout the year. Taxpayers suffer opportunity costs from withholding An opportunity cost is a missed opportunity - and if you already "spent" some of your income on future taxes, you can't use them for consumption today.

For example, taxpayers lose out on the interest they could be earning on their tax dollars all year if they could hold on to the money until April. Over the course of a year, let alone a lifetime, this lost interest really adds up. Citizens who want to withhold their support for certain types or all types of government spending or who believe that the income tax is unconstitutional can have a difficult time keeping their money from the government under the tax withholding system.

Because taxes aren't withheld from investment income or self-employment income and a few other less common types of income , the withholding system is said to penalize wage earners, or those whose taxes are collected at the source from each paycheck. They have to pay up sooner, which means that their opportunity costs from the withholding system are higher. The employers who protested tax withholding in and got it revoked in had good points that are still true today. Businesses have to hire additional staff to deal with tax withholding and spend time and money on tax compliance that could be spent on improving their businesses or paying workers more.

Generally, taxpayers should make estimated tax payments in four equal amounts to avoid a penalty. However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method. Use Form , Underpayment of Estimated Tax by Individuals, Estates, and Trusts to see if you owe a penalty for underpaying your estimated tax. More In Help.