What are the implications of employer increasing allowances on W-4?

Question

When I started my job, I filled out a W-4 and claimed 3 allowances. While going over my pay check information, I noticed that my employer stopped taking out federal taxes each check.

I went in and they said the W-4 on file that I submitted "Total number of allowances you’re claiming: 3", but they said the computer says I'm at "6" and they would not explain why.

As I know, this means when I file taxes next January, I'll need to pay a lot, which is really inconvenient.

Two years on...and my employer made the mistake a second time, and to at least one other employee I know. This makes me wonder, is there some advantage to the employer for making this mistake again and again? For instance, does that mean my employer did not pay their fair share of taxes too? Or is there some other possible motivation for them to mess this up three times?

Answer 1

If your withholdings have gone up, then you have been paying too little tax and might be in danger on an underpayment penalty (or at least a large tax bill when you file). Your employer's share is not dependent on your allowances (their share is for medicare and social security, not income tax).

That said, 6 allowances shouldn't be enough to stop withholding taxes altogether unless you're making about $25k or less.

Luckily it's not too late to correct the situation. Find a withholding calculator online, plug in the pertinent information (which should include the amount withheld to date) and see how many allowances it recommends. I would start with 1 to be safe, see how much is withheld, and extrapolate that out to the rest of the year to see if it will be enough to match what you paid last year (which should be fairly close unless you've gotten a large raise, and will avoid a penalty). If it's significant;y higher than needed, drop it down to 2 or 3 and check again after a few paychecks.

Answer 2

is there some advantage to the employer for making this mistake again and again? For instance, does that mean my employer did not pay their fair share of taxes too? Or is there some other possible motivation for them to mess this up three times?

No, I don't think there's any advantage. Assuming that they are still paying their share of Social Security and Medicare taxes and your gross paycheck amount is correct, they aren't gaining anything. The employer does get a tax deduction for wages paid to employees, but that amount is the same regardless of your withholding.

Most likely it's a software or human error with the payroll system.

As of 2020, the IRS released a new W-4 form which does away with the allowances because of recent changes to the tax code. Employees are not required to fill out the new form, and employers can use the old W-4 information to calculate withholding.

What I'm thinking in your situation is that something changed with your employer's payroll system, maybe to accept the newer W-4 forms. The best thing to do is to fill out the 2021 version of the W-4 form and submit to your employer. Hopefully this will "refresh" their system and fix the under-withholding issue.

Keep in mind that the W-4 form will likely change again for 2022 tax reporting because of changes to the child tax credit (increased from $2,000 and now based on the child's age). So you will probably have to fill out another one when that becomes available.

Answer 3

Something similar happened to me when our company switched from ADP to Workday. The switch resulted in changed allowances for myself plus a few others. Perhaps your employer switched payroll software or it received an update or something simliar that distorted the information.

As far as if making the change intentionally will somehow benefit your employer, the answer is no. The unpaid taxes may result in an added expense for your employer or onto you, which it seems it had, and makes for an irritated employee thinking the company does not have their best interest, which they do not want.

If it were me, I'd ask what payroll software they use and see if you can find a point of contact either within the company or the vendor they use. From there, I'd ask about the history of the software they use and if it received any updates, server changes, etc.

Answer 4

This makes me wonder, is there some advantage to the employer for making this mistake again and again? For instance, does that mean my employer did not pay their fair share of taxes too? Or is there some other possible motivation for them to mess this up three times?

There is zero incentive for them to make this mistake. While they do have to give the money they withhold from their employees pay to the US and state governments, it doesn't save them any money by making this mistake.

They do have some taxes they have to pay regardless of how you fill out your w-4's, those are the employer portion of Social security and Medicare taxes.

This is a sign of sloppiness. They are requiring the employees to complete a paper copy of the W-4, or having you submit a pdf of the form, then they are having a member of the office staff update the records.

Decades ago I had an employer that received my updated W-4, put forgot to change the values. After a few paychecks without seeing the change, I resubmitted the W-4, except that when the office staff got the second form they compared the two forms and discovered there was no change. So they again didn't update the settings. When it failed the 3rd time, I called and got it straightened out

You can suggest that the look into payroll processors that integrate the tax forms right into the payroll process. These systems allow the employee to see what w-4 options they have picked, and allow them to adjust them with every paycheck. A member of the office staff doesn't have to manually enter anything, the employee does 100% of the work. .