what is underwithholding
underwithholding is a term that refers to a specific tax situation in which an individual did not withhold an adequate amount of taxes from their wages during the year to cover the amount of taxes they owe breaking down underwithholdingunderwithholding is a term used to refer to an instance when an individual withheld an inadequate amount of taxes from wages or other income during the year to cover the amount owed to tax authorities withholding itself refers to the portion of an individual s wages that are taken out of his or her paycheck to cover federal state and local taxes 1 the irs calculates the amount of federal taxes withheld from the individual s paycheck based on income marital status and choices made by the taxpayer regarding number of dependents claimed and filing status married couples must decide whether to file jointly or separately a taxpayer may also elect to have additional money withheld for example to cover a side job for which taxes are not being taken out automatically similarly if a taxpayer expects to claim significant deductions on his or her annual taxes a reduction in withholding can be requested 2 taxpayers register these preferences with their employer by completing form w 4 employee s withholding certificate 3 paying taxes on one s income directly from each paycheck reduces the amount of taxes owed when an individual submits an annual tax return 3 if an individual has not paid in enough over the year to cover all of their tax obligations they will have to pay the remaining balance when they file their income taxes in addition a penalty fee may be charged if a taxpayer has significantly underwithheld to avoid this penalty it is necessary to have paid at least 90 percent of taxes owed in the current year or 100 percent of those owed the previous year taxpayers are allowed to use whichever figure is smaller however even if an individual does not meet this threshold it is still possible to avoid a penalty if the amount of unpaid tax is less than 1 000 or if the person had no tax liability the previous year 4 5 