Discovered Employer Didn't Withhold Enough Federal Taxes - What Can We Do?

Thank you for this detailed response! I didn't realize the W-4 had changed in 2020. He's been at this job for five years and I don't think he's updated his W-4 since he started. Could that be the issue - that they're using an outdated form? But even with the old form, shouldn't they still be withholding more than 1.5%? When we look at his actual paystubs, it shows Federal Withholding as a much smaller amount than Social Security and Medicare. Is there something specific we should ask the payroll department to check?

Yes, that's very likely the issue. The pre-2020 W-4 form used a completely different system with allowances/exemptions, and the IRS no longer supports that calculation method. If he hasn't submitted a new W-4 since 2020, the employer should have defaulted to a higher withholding rate (as if he were single with no adjustments), but clearly something went wrong. Looking at the paystubs is exactly right - federal withholding should generally be higher than Medicare (which is always 1.45%) and often higher than Social Security (which is always 6.2%). Ask payroll to verify what filing status and withholding instructions they have in their system for your husband. Request that they show you the actual withholding calculation they're using. Many payroll systems allow employees to see and update their W-4 information online - check if that's an option at his company.

Does this really work for getting penalties removed? My brother owes $5k from a similar situation and the IRS is charging him penalties even though it was clearly his employer's mistake. How detailed is the report they give you?

I'm a little skeptical... how does the system know what "should" be withheld? There are so many variables with taxes like deductions, credits, filing status, etc. Can it really figure all that out just from paystubs?

The report was detailed enough that it showed the correct withholding calculation based on current tax tables versus what was actually being taken out. It specifically identified which IRS Notice (I think it was 1036) that employers should be using for the current year. This was enough evidence for us to get most penalties waived using Form 843. For your second question, the system actually asks you about your filing status, dependents, and other tax situations as part of the analysis. It doesn't just look at paystubs in isolation - it builds a complete picture of what your withholding should be based on your specific tax situation. It even caught that my wife's employer wasn't accounting for our joint filing status properly, which was causing part of the under-withholding.

Wait, how does this actually work? The IRS phone system is notoriously impossible to get through. Do they have some special connection or something?

This sounds like a scam. Nobody can magically get through IRS phone lines when millions of people can't. And if they could, why would they share this "secret" for a fee instead of charging thousands to tax firms?

They use an automated system that continuously calls the IRS and navigates the phone tree for you. When they get through to a representative, they connect the call to your phone. There's no special connection or backdoor - just technology doing the tedious work of getting through the phone system. It works because most people give up after a few attempts, but their system is persistent and calls hundreds of times if necessary. It's basically doing what you could theoretically do yourself if you had unlimited time and patience to keep redialing. Nothing magic about it - just really convenient when you're desperate to talk to someone.

He did get a small bonus in December - about $1,000. But even if they messed up the withholding on that, it wouldn't explain why his regular checks all year were only having 1.5-2% withheld, right? He's been at the same company the whole time. Would it help to ask for a corrected W-2? Or is the issue not with the W-2 but with the actual withholding throughout the year?

You're right that a small bonus wouldn't explain the year-long underwithholding. The W-2 is likely correct if it matches what was actually withheld from his paychecks - the problem is with the withholding calculation itself. A corrected W-2 would only be needed if the W-2 doesn't match what was actually withheld. What you need is to address why the withholding was calculated incorrectly all year. As others have mentioned, having your husband submit a new W-4 using the current form is critical for this year to prevent the same problem from happening again. But for the taxes you already owe, you'll need to work with the IRS on a payment plan and potentially penalty abatement as suggested earlier.

This happened to me too! I got married and my spouse and I both kept our W-4s set as "Single" which caused massive underwithholding. When two people with similar incomes file jointly, it can push you into a higher tax bracket than either of you anticipated with your individual withholding.

This is exactly the kind of professional insight we needed! Thank you for breaking down what likely happened. It makes so much sense that the old W-4 combined with updated tax calculations would create this mess. One follow-up question - when you mention making estimated tax payments for 2024, how do we calculate what those should be? Should we base it on what we owe now ($4,100) divided by 4 quarters, or is there a different calculation we should use while waiting for his employer to fix the withholding? Also, do you have any specific language we should use when requesting the penalty abatement? I want to make sure we frame this correctly as employer error rather than our mistake.

For estimated tax payments, don't just divide the $4,100 by 4 quarters - that won't account for your actual 2024 tax liability. Instead, use Form 1040ES to calculate what you'll owe for 2024 based on expected income. The safe harbor rule is generally to pay 100% of last year's total tax liability (110% if your AGI was over $150k) divided by 4 quarters, which will avoid penalties even if you end up owing more. For penalty abatement language, focus on "reasonable cause" due to employer error. Key phrases to include: "Despite providing accurate information on Form W-4," "employer failed to implement correct withholding procedures," and "taxpayer relied on employer to properly calculate withholding." Include copies of the W-4 he filed, documentation of your attempts to resolve with payroll, and evidence of the incorrect withholding rates compared to IRS Publication 15 tables. The IRS looks favorably on abatement requests when you can show you acted in good faith but were let down by a third party (the employer) despite providing correct information.

For estimated payments, use Form 1040ES to calculate what you should pay quarterly. Generally, you need to pay either 90% of this year's tax liability or 100% of last year's (110% if your prior year AGI exceeded $150k). Since you're dealing with underwithholding, I'd recommend calculating based on your expected 2024 liability assuming proper withholding gets fixed. For the penalty abatement request on Form 843, use language like: "Taxpayer provided correct information on Form W-4 but employer failed to withhold appropriate federal income taxes despite accurate filing status and exemption information provided. Attached documentation shows actual withholding rate of 1.5-2% compared to required rate of approximately 10-12% for taxpayer's income level and filing status." Key is to emphasize that you provided correct information but the employer's payroll system failed to execute proper withholding calculations. Include copies of the W-4, pay stubs showing the low withholding rate, and any written communication with the employer acknowledging the error. The IRS looks favorably on penalty relief when you can demonstrate reasonable cause and that the underpayment wasn't due to willful neglect on your part.

For estimated payments, use Form 1040ES which has worksheets to calculate what you should pay quarterly. Generally, you need to pay either 90% of this year's tax liability or 100% of last year's (110% if your prior year AGI exceeded $150k). Since you had significant underwithholding last year, I'd recommend calculating based on what your total 2024 tax should be with proper withholding from both incomes. A rough estimate: take your expected 2024 total tax liability, subtract what will actually be withheld from both your jobs (including his corrected withholding once fixed), then divide the difference by the remaining quarters. Don't just use the $4,100 - that was last year's shortage. For penalty abatement language, focus on "reasonable cause" due to employer error. Key phrases: "Despite providing accurate information on Form W-4," "employer failed to implement correct withholding calculations," "taxpayer relied on employer's payroll system in good faith." Include copies of his W-4, pay stubs showing the incorrect withholding rates, and any written communications with payroll. Form 843 specifically asks you to explain the circumstances - be factual and emphasize that you provided correct information but the employer's system failed to process it properly.

For estimated payments, don't just divide the $4,100 by 4 - that approach could leave you short again. Instead, calculate what your total 2024 tax liability should be with proper withholding from both incomes, then subtract what will actually be withheld throughout the year to determine your quarterly payment amount. A safer approach: Use Form 1040ES to calculate your estimated payments based on your expected 2024 income. The IRS generally requires you to pay either 90% of the current year's tax or 100% of last year's tax (110% if your prior year AGI was over $150k) to avoid penalties. For penalty abatement language, focus on "reasonable cause" due to employer error. Key phrases: "Despite providing accurate information on Form W-4," "employer failed to implement proper withholding calculations," "taxpayer relied in good faith on employer's payroll system." Include copies of the W-4, paystubs showing the incorrect withholding percentages, and any written communications with the employer about the error. Document the timeline showing when you discovered the error and your immediate steps to correct it. The IRS looks favorably on taxpayers who act quickly once they realize there's a problem.

For estimated payments, don't just divide the $4,100 by 4 - that would likely be insufficient. You need to calculate based on your expected 2024 tax liability. Use Form 1040ES to determine the proper amount, but as a rough estimate, aim to pay 110% of last year's total tax liability (including the $4,100 you now owe) divided by 4 quarters. For penalty abatement language, be specific: "Request for penalty abatement under IRC Section 6664(c) due to employer payroll error despite accurate taxpayer-provided withholding information. Taxpayer completed W-4 correctly with zero allowances, but employer applied incorrect withholding rate of 1.5-2% instead of standard rate of approximately 10-12% for taxpayer's income level and filing status." Include copies of the W-4, paystubs showing the incorrect withholding, and any written communication with the employer about the error. The key is proving you provided correct information but the employer failed to implement proper withholding calculations. Document everything with dates and keep records of all attempts to resolve with the employer.

For estimated payments, don't just divide the $4,100 by 4 - that won't account for your current year tax liability. Use Form 1040ES to calculate what you'll actually owe for 2024 based on expected income. Generally, you need to pay either 90% of current year tax or 100% of last year's tax liability (110% if your prior year AGI exceeded $150k) to avoid penalties. Since you're already behind on 2023, I'd recommend calculating 110% of your total 2023 tax liability (including the $4,100 shortfall) and making sure your 2024 withholding plus estimated payments meet that threshold. For penalty abatement language, focus on "reasonable cause" under IRC Section 6664(c). Key phrases: "Despite providing accurate information on Form W-4, employer failed to withhold correct amount of federal income tax" and "taxpayer exercised ordinary business care and prudence but was unable to comply due to circumstances beyond taxpayer's control." Include copies of the W-4, paystubs showing incorrect withholding rates, and any correspondence with the employer's payroll department.

For estimated payments, you'll want to calculate based on your expected 2024 tax liability, not just the 2023 shortage. Use Form 1040ES to estimate your total 2024 tax, then subtract what will be withheld from both your jobs (assuming his gets fixed). Divide the remainder by the number of quarters left in the year. For penalty abatement language, focus on "reasonable cause" due to employer error despite "ordinary business care." Include phrases like: "Taxpayer provided accurate information on Form W-4" and "Employer failed to implement correct withholding despite proper employee documentation." Attach copies of the correctly completed W-4, pay stubs showing the incorrect withholding rate, and any written communications with the employer about the issue. The key is demonstrating you acted reasonably but circumstances beyond your control (employer's system error) caused the underpayment. Form 843 specifically allows for abatement when underpayment results from employer withholding errors despite correct employee information.

For estimated payments, use Form 1040ES to calculate what you should pay quarterly. Don't just divide the $4,100 by 4 - you need to base it on your expected total tax liability for 2024. The safe harbor rule is to pay 100% of last year's tax (or 110% if your AGI was over $150K), so if you paid $X in total tax for 2023, paying that amount through withholding plus estimated payments will avoid penalties. For penalty abatement language, focus on "reasonable cause" due to employer error. Key phrases: "Despite providing correct information on Form W-4, employer failed to withhold adequate federal income tax" and "Taxpayer exercised ordinary business care by submitting proper withholding forms." Include copies of the W-4, pay stubs showing minimal withholding, and any correspondence with the employer's payroll department. Form 843 specifically asks for the reason penalties should be abated - check box "Reasonable cause" and attach a detailed explanation with your supporting documents. The IRS looks favorably on cases where you can prove you provided correct information but the employer made calculation errors.

For estimated payments, use Form 1040ES to calculate what you should pay quarterly. Don't just divide the $4,100 by 4 - that's last year's shortfall. You need to estimate your total 2024 tax liability and subtract what will be withheld (hopefully correctly once the W-4 is fixed). A rough rule is to pay 100% of last year's total tax liability (110% if your AGI was over $150k) divided by 4 quarters to avoid penalties. For penalty abatement language, focus on "reasonable cause" due to employer error. Key phrases: "Despite providing correct information on Form W-4, employer failed to withhold adequate federal income taxes" and "Taxpayer exercised ordinary business care by properly completing required forms." Include copies of the W-4, paystub examples showing incorrect withholding rates, and any written communications with payroll. Form 843 specifically asks you to explain the circumstances - be factual and emphasize that you provided correct information but the employer's system failed to process it properly. The IRS looks favorably on penalty relief when taxpayers can show they did everything right but were let down by third-party errors beyond their control.

For estimated payments, use Form 1040ES which has worksheets to calculate what you should pay. Generally, you need to pay either 90% of this year's tax liability OR 100% of last year's liability (whichever is smaller) to avoid penalties. Since you're fixing the withholding mid-year, calculate based on your expected total 2024 tax liability minus what will actually be withheld after the correction. For penalty abatement language, focus on "reasonable cause" due to employer error. Key phrases: "Despite providing correct information on Form W-4, employer failed to withhold appropriate federal taxes" and "Taxpayer relied on employer's payroll system to calculate proper withholding." Include copies of the W-4 submitted, correspondence with payroll, and paystub evidence showing the incorrect withholding rate. Form 843 has a specific section for this - check box for "reasonable cause" and attach a detailed explanation with supporting documents. The IRS generally accepts these requests when you can prove you provided correct information but the employer's system failed to process it properly.

For estimated payments, don't just divide the $4,100 by 4 - that could leave you short again. Instead, calculate based on your total expected 2024 tax liability. Use the IRS Form 1040ES worksheet or the online tax withholding estimator at irs.gov/W4App. Generally, you need to pay either 90% of this year's tax liability OR 100% of last year's liability (110% if your prior year AGI was over $150k). Since you had underwithholding issues, I'd recommend the 110% of last year route to be safe. For penalty abatement language, focus on "reasonable cause" due to employer error. Key phrases: "Despite providing correct information on Form W-4, employer failed to withhold appropriate federal taxes" and "Taxpayer relied in good faith on employer's payroll system." Include copies of the W-4, paystubs showing minimal withholding, and any correspondence with payroll. Form 843 is the right form, and attach a detailed letter explaining the timeline of when you discovered the error and steps taken to resolve it. Document every interaction with the employer going forward - dates, names, what was discussed. This creates a paper trail showing you acted promptly once you discovered the issue.

For estimated payments, don't just divide the $4,100 by 4. You need to calculate based on your expected 2024 tax liability. Use Form 1040ES worksheets or the IRS withholding calculator online. Generally, you need to pay either 90% of current year tax or 100% of last year's tax (110% if your prior year AGI exceeded $150k) to avoid penalties. Since you're fixing the withholding issue, once his employer corrects it, you may not need estimated payments at all - the increased withholding should cover it. I'd recommend getting the W-4 fixed first, then see what the new withholding amounts look like before committing to quarterly payments. For penalty abatement language, focus on "reasonable cause" - emphasize that despite providing correct information on the W-4, the employer failed to withhold the proper amount. Include phrases like "taxpayer provided accurate information," "employer error in withholding calculation," and "taxpayer took reasonable steps to ensure proper withholding." Attach copies of the W-4, pay stubs showing the low withholding rate, and any correspondence with the employer about the issue.