DEFINITION of 'Underwithholding'

Inadequate withholding of taxes from wages or other income during the year. Underwithholding will result in a balance due upon filing. Significant underwithholding can result in a nasty surprise for the taxpayer, especially if there is substantial interest and penalties involved. Generally, it is often a good idea to overwithold taxes to avoid a financial surprise at filing time that could become a significant financial burden.

BREAKING DOWN 'Underwithholding'

Some taxpayers deliberately choose to have their taxes underwithheld, for various reasons. Sophisticated taxpayers may be able to invest the amount that would otherwise be withheld more profitably throughout the year and still come out ahead after paying the tax. Others simply may not wish to have the government hold on to their money during the year and keep it in a separate account to earn interest instead.

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  1. Why does the IRS withhold income taxes from employee paychecks?

    In the midst of WWII, the U.S. government ran into trouble funding the war effort. The problem did not originate from citizens ... Read Full Answer >>
  2. If an employee is paid by commission, who is responsible for withholding taxes?

    It depends. An individual who receives commissions can be treated in the same manner as an individual who receives straight ... Read Full Answer >>
  3. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
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    While your fire or homeowners' insurance premiums may be included in your property payments, they are nondeductible expenses, ... Read Full Answer >>
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