What is the consequence of not adjusting your payroll tax withholding after a salary increase?

• A. Higher refunds
• B. Underpayment penalties
• C. Fewer deductions
• D. Increased tax liability

Answer: (D)

When you receive a salary increase but do not adjust your payroll tax withholding accordingly, it can lead to an increased tax liability. This happens because your income increases, but your withholding amount may still be based on your previous, lower salary. Since payroll taxes are withheld as a percentage of your income, a salary increase usually results in a higher overall tax obligation for the year.

If your withholding does not adequately reflect your new salary, you may not be paying enough in taxes throughout the year. This mismatch could culminate in a situation where you owe more taxes when you file your return, as the IRS expects taxpayers to pay a reasonable amount throughout the year based on their earnings. Thus, maintaining an appropriate withholding percentage is vital to ensure that your withholding aligns with your increased income, avoiding a significantly larger tax bill at the end of the year.