Overview

When an employer withholds too little federal income tax from your paychecks, you may face an underpayment of tax at filing time. The IRS expects income tax to be paid as you earn it; if you don’t pay enough via withholding or estimated tax, the agency can assess interest and an underpayment penalty. The good news: there are clear actions you can take immediately to reduce or eliminate penalties, and there are administrative remedies if the error is the employer’s fault.

This guide—based on IRS guidance (see IRS Publication 505 and Form 2210) and over 15 years of tax and financial planning experience—walks through what causes withholding errors, what the IRS can charge, and step-by-step remedies you can use in 2025.

Sources: IRS Publication 505 (Tax Withholding and Estimated Tax), IRS Form 2210 (Underpayment of Estimated Tax). See: https://www.irs.gov/publications/p505 and https://www.irs.gov/forms-pubs/about-form-2210.

Why withholding errors happen (common causes)

  • Incorrect or incomplete W-4 on file (new hires or life changes). See the IRS Form W-4 instructions: https://www.irs.gov/forms-pubs/about-form-w-4.
  • Payroll system or human error in calculating withholdings or payroll taxes.
  • Multiple employers where each withholds only for the income at that job without coordinating total household withholding.
  • Changes in income mid-year (bonuses, equity vesting, side income) that aren’t reflected in current withholdings.
  • State withholding misapplied or missed after a move—state rules differ.

In my practice I’ve seen simple W-4 entry mistakes and payroll software configuration errors produce four-figure deficiencies by year-end. The earlier you catch them, the easier and cheaper the fix.

Immediate steps if you discover an underpayment mid-year

  1. Confirm the math. Reconcile year-to-date wages and federal income tax withheld on your pay stubs against the withholding you expect using the IRS Tax Withholding Estimator: https://www.irs.gov/individuals/tax-withholding-estimator.
  2. Update your W-4. Submit a corrected Form W-4 to your employer with higher withholding allowances or additional dollar amount to be withheld per pay period. (See guidance on completing a W-4.) For help, see our site: Fixing Incorrect Withholding: Steps to Update Your W-4.
  3. Ask payroll to re-run or correct future withholding. Employers can change how much they withhold going forward. If the error was payroll-side, ask HR or payroll to document the fix.
  4. Consider an immediate estimated tax payment. If increased withholding won’t catch up quickly, make an estimated quarterly payment using Form 1040-ES or pay online at IRS Direct Pay. See IRS Form 1040-ES: https://www.irs.gov/forms-pubs/about-form-1040-es.
  5. If withholding error affected prior closed tax years, ask whether a corrected W-2 (Form W-2c) is appropriate—employers can issue W-2c for employer mistakes.

Internal resources to help you: “Withholding Basics: How to Adjust Form W-4 to Avoid Large Bills” and “Federal Withholding vs. Estimated Taxes: Which Applies to You?” (internal links below).

How the IRS decides whether to charge a penalty

Two key rules determine penalty exposure:

  • Owe more than $1,000 after subtracting withholding and refundable credits? You may face an underpayment penalty for the periods you underpaid. (IRS guidance summarized in Publication 505.)
  • Safe-harbor test: you avoid a penalty if you pay at least 90% of the current year’s tax liability, or at least 100% of the prior year’s tax liability (110% for taxpayers with adjusted gross income over $150,000; $75,000 if married filing separately). These percentages reflect the IRS safe harbor rules in Publication 505 and Form 2210.

If you don’t meet safe-harbor and you underpaid during specific periods, the IRS computes a penalty—basically interest—on the underpaid amount for the days it was unpaid. The IRS sets the rate quarterly; Form 2210 will calculate the penalty automatically if you choose to file it.

Using Form 2210 (Underpayment of Estimated Tax) and the annualization option

Form 2210 helps you determine and (when appropriate) request a reduction or waiver of the penalty. Two important features:

  • Regular calculation shows what you owe for each payment period.
  • Annualization method can be used when your income was uneven during the year (for example, big bonus or equity vesting late in the year). Annualization can reduce or eliminate a penalty because it matches tax payments to when income was earned.

If the underpayment resulted from employer error and you have documentation (e.g., written payroll notices, W-2/W-2c requests, email exchanges), you can attach a statement with Form 2210 or your return requesting a waiver for “reasonable cause.” The IRS can abate penalties when reasonable cause is shown; this is assessed case-by-case (see Form 2210 instructions and Publication 505).

Sample scenario (practical illustration)

A taxpayer discovers in November that only 5% of pay was withheld year-to-date instead of the 15% their W-4 intended. Their projected tax liability is $10,000 for the year; they’ve had $2,500 withheld to date. They now face a $7,500 shortfall.

  • Quick remedies: increase withholding immediately so the last pay periods withhold more; make an estimated payment for the shortfall; consider borrowing short-term or re-allocating savings to avoid surprise. If they meet the safe-harbor with an additional large payment that brings total withholding and estimated payments to either 90% of current year liability or 100% (110% if AGI over $150k) of last year’s tax, they avoid the underpayment penalty.
  • If timing makes catching up impossible, use Form 2210 and annualization or request an abatement of penalty for reasonable cause. Even then, interest usually accrues on unpaid tax until paid.

When the employer is at fault: do this

  • Document everything: save pay stubs, W-2, written communications with HR or payroll.
  • Request corrected payroll and a W-2c if the employer misreported prior-year wages or withholding.
  • If HR won’t cooperate, escalate to the company’s payroll manager or finance department and request a written response; consider contacting the Department of Labor for state-related withholding issues.
  • If the employer issued incorrect W-2 figures that caused you to underpay previous-year taxes, you may still be responsible for the tax, but the employer’s error can support a reasonable-cause claim for penalty abatement.

In my practice, employers typically correct withholding going forward when shown clear documentation. Rarely will an employer retroactively cover a taxpayer’s IRS penalty, but strong documentation increases the chance the IRS will abate the penalty.

Practical checklist and timeline

  • Immediately: Recalculate year-to-date withholding vs. expected tax; update W-4; make an estimated payment if needed.
  • Within 2 weeks: Ask payroll for corrections and a plan to increase withholding. Get confirmations in writing.
  • At tax-filing time: Use Form 2210 if you owe a penalty or want to document your calculations. Attach a statement explaining employer error and include copies of supporting payroll correspondence.
  • If denied abatement: Pay the underlying tax to stop further interest; then consider filing an appeal or contacting a tax professional to request relief.

Common mistakes to avoid

  • Waiting until you file your return to discover the shortfall—act as soon as you suspect a problem.
  • Assuming the employer will automatically fix prior withholding mistakes without documentation.
  • Overlooking safe-harbor options (they can often be cheaper than paying penalties).

When to get professional help

If the shortfall is large, the employer refuses to cooperate, or you expect complex issues (multistate withholding, multiple employers, self-employment income), consult a CPA or tax attorney. In my experience, early engagement of a tax professional reduces stress, improves negotiation with payroll, and increases the odds of penalty abatement when reasonable cause exists.

Helpful resources (official)

Consumer guidance: Consumer Financial Protection Bureau (CFPB) on managing unexpected tax liabilities: https://www.consumerfinance.gov

Internal resources

Final practical advice

Act early. Small mid-year corrections (a higher voluntary withholding amount or an estimated payment) are often far cheaper than waiting for the IRS to calculate penalties and interest. Keep clear records of payroll communications and withholding changes—those documents are the best evidence if you later request penalty relief based on employer error.

Professional disclaimer: This article is educational and does not constitute individualized tax advice. For advice tailored to your situation, consult a licensed CPA or tax professional. Information here reflects IRS guidance current as of 2025 and may change; always verify with IRS publications and forms.