Payroll Withholding

• When you were hired, your employer gave you a W-2 form to complete. On the W-2, you provided information about your marital status and how many withholding allowances you wanted to claim. Each withholding allowance is equal to an annual exemption divided by the number of pay periods per year. Suppose you are paid weekly. In 2010, the exemption amount was $3,650. Divided by 52 weeks, this comes to $70.19 per week. For each allowance you claimed, $70.19 was subtracted from your total pay before figuring your payroll tax. Thus, each withholding exemption reduced the amount of tax taken out of your pay.
  
  

Underpayment

• If not enough taxes were withheld from your pay, it could be for several reasons. Sometimes a person's personal situation changes due to a divorce or an older child who can no longer be claimed as a dependent. These events change the number of withholding allowances you should claim. If you have a second job, your employers don't take that into account when figuring your payroll taxes. Another reason not enough tax is withheld is if you have significant income from investments or self-employment.
  
  

Penalties

• If underpayment of income taxes during the year is great enough, the IRS will impose a penalty. However, the penalty is waived for several reasons. There's no penalty if the amount withheld was at least as much as was withheld the previous year, or 110 percent of the prior year's withholding if your adjusted gross income is over $150,000. You don't pay a penalty if you owed less than $1,000 after subtracting taxes withheld the previous year or if you owed less than $1,000 this year and taxes were not withheld from your pay.
  
  

Solution

• You can submit a new W-2 form to your employer to change the amount of tax withheld anytime it is necessary. There are two ways to do this. First, you can claim fewer withholding allowances. Second, you may request that a specified extra amount of tax be taken out of each paycheck. The IR provides a withholding calculator on its website (IRS.gov) to help you figure out how much tax you need to have deducted from each paycheck. The W-2 form also comes with worksheets to help you calculate withholding allowances.