How to Calculate the Penalty for a W4 Withholding
Claims you make on Form W-4 tell your employer how much income tax to withhold from your pay. Your employer is not allowed to disagree with the allowances you claim, and in most cases, is required to withhold at the rate prescribed for the filing status and number of exemptions you claim on your W-4. If you intentionally claim more withholding allowances than you should, causing reduced income tax withholding and an underpayment of your income tax, the IRS may assess several penalties against you. If this occurs, the IRS can also instruct your employer to withhold at a different rate, regardless of what you claim on Form W-4.
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Instructions
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Determine if you intentionally made false withholding allowance claims on Form W-4 without basis for the claims. If you claim excess withholding allowances to reduce the amount of income tax withheld from your check and do not have reasonable cause to claim the allowances, the IRS imposes a $500 penalty. Making a mistake in the number of allowances you claim, such as claiming five allowances when you should claim four does not constitute an intentionally erroneous claim. An example of a claim subject to penalty is a single taxpayer with no dependents claiming nine withholding allowances.
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Determine your criminal penalty for making false or fraudulent withholding allowance claims on Form W-4. In addition to the $500 penalty for making false claims, the IRS may assess a criminal penalty of $1,000 plus up to one year in prison, or both.
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Determine your penalty for underpayment of taxes. If you claim additional withholding allowances to reduce the amount of income tax withheld from your pay, you may owe taxes at the end of the year. If you owe more than $1,000 in the year you have an underpayment, the IRS may assess an underpayment penalty. However, if you owe more than $1,000 but paid more than 90 percent of your taxes due for the year, or pay 100 percent of the taxes you owed in the previous year, the IRS may not assess the underpayment penalty. If you owe more than $1,000, you must use IRS Form 2210 to determine if you will be penalized and the amount of any potential penalty. Form 2210 is available for download on the irs.gov website.
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