Do All Jobs Have to Take Out Federal Taxes on Your Wages?

Employee income tax is based on how much income an individual earns. Income tax is one of the most common forms of taxation around the globe. Most income tax systems are structured as a regressive tax, meaning that those with higher incomes pay a higher percentage, and those with lower incomes pay less. In the United States, IRS regulations define income tax as a "pay as you go" tax.

Taxes you are expected to owe the IRS are deducted from every paycheck rather than being paid in a lump sum at the end of the year. There are, however, a number of exceptions to the pay-as-you-go rule. If your employer didn't take out federal taxes from your paycheck, you could end up owing a big lump of money to the IRS when you file your taxes. Some employees avoid this situation by paying quarterly estimated taxes throughout the year.

Tax Withholding and Exemptions

Employers are generally required to withhold income taxes from their employees' pay. However, employees do have some control over the amount of income tax withheld given that you choose the number of exemptions you claim on your W-2 form. If you claim all of your exemptions, then the minimum amount of income tax is withheld. But if you are eligible for three exemptions, but only claim zero or one, then a greater percentage is withheld for taxes.

Claiming all of your exemptions leads to bigger paychecks. However, the risk of not claiming exemptions is that you might owe additional income tax depending on your financial circumstances. Not claiming all of your exemptions means you are more likely to receive an income tax refund as you have in effect overpaid throughout the year.

According to H & R Block, some employees are exempt from federal tax witholding if they meet certain criteria established by the IRS. Specifically, they must have no past or anticipated tax burden. For example, if no federal taxes were taken out of the paycheck in 2020 because the employee already had an exemption, or owed no taxes the previous tax year and expects a similar situation in 2021, that employee may be exempt from federal withholding in the current tax year.

Independent Contractors

Independent contractors have different tax forms than the standard W-2 Wage and Tax Statement. They are basically running their own businesses even if they have not legally formalized the arrangement, so the IRS considers monies paid to independent contractors to be more like business income. Therefore, income taxes are generally not withheld from payments.

Independent contractors do have to pay income taxes, but only on the amount after business expenses have been deducted. In most cases, independent contractors pay income taxes on a quarterly basis (estimated taxes) using IRS Form 1040-ES. Employers are required to report to the IRS if they pay an independent contractor ​$600​ or more per year, even if they do not withhold taxes. Independent contractors can also get hit with an underpayment penalty if they don't pay quarterly, according to Finance.

Backup Withholding

The IRS requires employers to withhold taxes for employees and independent contractors who do not supply a taxpayer identification number or who supply an incorrect taxpayer identification number. This is called "backup withholding." The withholding percentage was a flat rate of 24 percent, according to IRS Topic No. 307 withholding instructions issued in 2021. Backup withholding might also apply to individuals who owe past taxes.

Exception for Domestic or Household Employees

IRS Publication 926 specifies an exception that employers do not have to withhold income taxes from the pay of domestic or household employees. However, depending on the circumstances, you may be responsible for paying Social Security, Medicare and/or unemployment taxes. Employers may withhold income taxes if the household employee requests that they do so.