If no federal taxes are withheld from your paycheck, you will likely face a large, unexpected tax bill when you file your return, along with potential underpayment penalties and interest. Because the U.S. has a pay-as-you-go system, you are responsible for paying taxes on income as it is earned.
Yes, you can still get a federal tax refund even if no taxes were withheld from your paychecks, primarily through refundable tax credits like the Earned Income Tax Credit (EITC) or the American Opportunity Tax Credit (AOTC) for education, or if your deductions and credits exceed your income. You must file a tax return to claim any potential refund, as the IRS won't send money automatically if nothing was paid in.
Employers are required by law to withhold employment taxes from their employees. Employment taxes include federal income tax withholding and Social Security and Medicare taxes.
No, you generally cannot sue your employer directly for failing to withhold federal taxes, as the Internal Revenue Code (IRC) makes the employer liable for those taxes, not the employee, and prohibits employees from suing their employer for the withheld amount, but you must still pay the taxes yourself and can report the employer to the IRS. Your main recourse is to pay the taxes owed, get a Substitute W-2 (Form substitute), and report the employer's fraud to the IRS and state authorities, as the employer faces serious civil and potential criminal penalties for this.
Federal taxes start being withheld as soon as you earn income, but the amount taken out depends on your income level, filing status, and allowances on your W-4; you might not owe federal income tax until your taxable income exceeds the standard deduction (e.g., $15,750 for single filers in 2025), but payroll taxes (Social Security/Medicare) are taken from the first dollar earned. For self-employed individuals, federal income tax is generally due if you make over $400 net income.
You can claim exemption from withholding only if both the following situations apply: For the prior year, you had a right to a refund of all federal income tax withheld because you had no tax liability. For the current year, you expect a refund of all federal income tax withheld because you expect to have no liability.
If employers willfully fail to collect or deposit employment taxes, the government may also impose a Trust Fund Recovery Penalty (TFRP). It carries a much harsher penalization rate than the failure to deposit penalty and could potentially subject employers to additional consequences, including criminal charges.
Each employee determines their own amount of withholding. If Box 2 is empty on your W-2, it means either you claimed exempt on your withholding or your calculated withholding elections exceeded your salary, so no amount was withheld from your paychecks.
In most cases, no—if you had no income during the year, the IRS doesn't require you to file a tax return. But there are some good reasons why you might want to file anyway: To claim refundable tax credits (like the Earned Income Tax Credit or Child Tax Credit) To receive stimulus payments or other government benefits.
If you qualify for certain tax credits but owe no tax, you might be able to claim the excess tax credit as a refund when you file your return. Filing a tax return typically starts the clock running for the amount of time the IRS can audit your return for a given year.
It is, thus, up to the independent contractor to calculate and pay the taxes they owe from the untaxed earnings to the IRS. A general rule of thumb is to set aside 30-35% of your income for your taxes.
You must meet certain requirements for an exemption* from withholding to apply and to have no federal income tax withheld from your paychecks. Even if you are exempt from federal income tax withholding, your employer should still be withholding Social Security and Medicare taxes from your pay.
To qualify for this exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. A Form W-4 claiming exemption from withholding is valid for only the calendar year in which it's furnished to the employer.
If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.