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- Federal Taxes
By Patrick Gleeson, Ph. D., Updated February 12, 2019
There is no threshold amount for withholding taxes from an employee's wages. As an employer, you're responsible for withholding taxes on every employee's wages from day one based on the information the employee provides to you on Form W-4. However, there is an income threshold that employees must reach before they are required to file federal and state tax returns.
The Difference Between Paying Taxes and Withholding Taxes
For the tax year 2018, some taxpayers have no obligation to pay federal income taxes at all. This is because their income was less than the standard federal deduction all taxpayers receive plus the additional deduction if they aren't claimed as a dependent on another taxpayer's return. For a single adult under 65 the threshold limit is $12,000. If the taxpayer earned no more than that, no taxes are due. This situation is only slightly different for other taxpayer brackets, such as for single taxpayers over 65, who have a gross income threshold of $13,600.
If no taxes are due, the taxpayer has no obligation to file a tax return.
Employer Tax Obligations
The fact that some taxpayers don't have to file a return concerns the taxpayer but not the employer. An employer who is new to the game might believe that if an employee's wages are less than $12,000, the employer doesn't need to withhold taxes. It seems to make sense initially; why would you withhold taxes that don't have to be paid?
When you think about that for a minute, you'll conclude that this can't be right. For one thing, most employment contracts – verbal contracts included – are open-ended, meaning there's a start date but no termination date. In most cases, as the employer, you won't know how much an employee might earn over the tax year, which is why you need to start deducting taxes from the first paycheck.
What if an employee is on a temporary assignment, and you know when you hire him that his total wages will be less than $12,000? You still have to withhold taxes. The employee may be on a temporary assignment and be gone in a month, having earned substantially less than the threshold but what about the rest of the year? He may, as many workers do these days, have a series of temporary employment positions. Until Dec. 31, no one can say for sure that his total wages will be under the $12,000 threshold, so with a single exception, you are obligated to withhold taxes on every employee's earnings.
The One Exception
Occasionally, you may have an employee who hands in a W-4 with so many exemptions that no taxes are due. Hold on to that employee's W-4, though, because the IRS has a right to ask you for it. If the IRS concludes the employee's deductions are improper, it'll send you a "lock-in letter," stating the maximum amount of exemptions the employee can claim. Save that letter as well, or better still, make a copy and give it to the employee. It will notify the employee that from now on you'll be deducting federal income taxes according to the IRS lock-in letter.
Withholding State Taxes
Whether you are obligated to withhold state income taxes as an employer depends on the state where the work occurred.
Seven states have no state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Residents of these states don't owe state taxes, so you have no taxes to withhold.
This is likely also the case in New Hampshire and Tennessee. These states don't tax wages, although they do tax interest and dividend income. An employee working in New Hampshire, for example, may have to pay taxes on dividend earnings, but that's between the employee and the state. Since the wages he earned aren't taxable, there's nothing for employers to withhold.
In all other states, that's not the case. In any state with a state tax on wages, employers must withhold an additional amount of wages for state taxes. The tax rates and payment procedures vary from state to state.
Cautionary Note for Employees
Although you have no obligation to file a federal income tax return if you're below the threshold, as a wage earner, you should think about filing a tax return anyway to claim a tax refund for the amounts withheld by your employer or employers during the year.
