Why ADP does not accurately withhold state and federal income tax (even if W4 is correct)?
ADP does not know your full tax situation and while the standard exemption system (actually designed by the IRS not ADP) works fairly well for most people it is an approximation.  This system is designed so most people will end up with a small refund while some people will end up owing small amounts.  So, while it is possible that ADP has messed up the calculations it is unlikely this is the cause.  The most likely cause is that approximation ends ups making you pay less tax during the year than you actually owe. A few people like your friend may end up owing large amounts due to various circumstances.  It is always your responsibility to make sure you pay enough tax throughout the year.  While this technically means that you need to do your taxes every quarter during the year to make sure you pay the correct tax during the year, for most people this ends up being unnecessary as the approximation works fine.  It is possible the exemption system failed your friend, but much more commonly people owe penalties because they put the wrong number of exemptions or had other side income. On a related note, most people in finance would argue that your situation where you owe some money at tax time, but not so much that you have to pay a penalty, is actually the best way to go.  Getting a tax refund actually means you paid more tax than you needed to.  This is similar to giving an interest-free loan to the government. I see several interesting statement in your question.  A. my only income is from my Employer B. I also receive employer stock (ESPP, RSU, NSO). However, employer withholds taxes for these stock transactions through my broker (I see them broken down on my W2).  C. I have been subject to Alternative Minimum Tax. A implies a simple tax return. B and C tell the opposite story. In fact if B is not done correctly The amount withheld due to payroll may be perfect but the under withholding could be due to the ESPP's, RSUs and NSOs.  The AMT can throw everything else out the window.  If a person has a very simple tax situation: Income doesn't change a lot from paycheck to paycheck; they take the standard deduction; the number of exemptions equals the number of people in the family. Then the withholding is very close to perfect.  The role of the exemptions on the W-4 is to compensate for situations that go above the standard deduction. The role of extra withholding is when the situation requires more withholding due to situations that will bring in extra income or if the AMT is involved.
"Look at how much tax you paid last year, including withholding and any additional amount that might have been due with the tax return. Look at the instructions for the W-4 form, which sets how much tax you want your employer to withhold. Adjust the numbers on that form until the total withheld during the year is close to what you expect this year's total to be -- remember, though, that there's no penalty for over-withholding but could be for under-withholding. Submit the W-4 form to your employer.  Remember that we're a few weeks into the year, so even if you adjust withholding now there will have been several paychecks at the prior setting; you can try to build that into your guesstimate of how to reset the withholding, or just not worry about it. Do the same with your state's withholding adjustments form. Repeat on a yearly basis, to account for raises, changes in other income, changes in filing status, etc. until it's close enough that you're satisfied with it. Then reconsider if/when your financial situation changes. Personally I find that exercise more effort than it's worth, and have simply set my withholding at ""close enough"". I usually get some money back from the feds and owe some to the state, but either is handled happily by my normal bank account balance." "Let me make sure I understand the point of what Adam Smith is going on about. In discussion of relative poverty, he relates the idea that an individual can be considered in poverty if they do not meet the customary amount of goods considered by their society to be the minimum to be polite in public. You have thus transferred his meaning of what poor means to be what is considered  ""basic living"". You have then taken this concept and tied the cost of ""basic living"", which you still haven't actually narrowed down, towards the tax rate on income for a citizen of a community. This is all in the context that you're concerned with the community level of price for ""basic living"" and whether its too high. However, you also haven't said what too high is nor why you're concerned with the literal price which is why I've said you can only control the price of a good through central authority.  I never made the assertion you wanted to invoke a centrally planned economy, I simply stated that the only way to control prices across a community is through central authority. You've stated that we collect taxes on local, state, and federal levels. This is true, however it does not mean that they control the price. They simply modify the price set by the market, and only serve to increase the price from the base set by market participants.   When I want to buy beer, I don't just pay for the cost of the beer. I pay the cost of the beer + the city tax + county tax + state tax + state sales tax on the beer, which raises the price. Also, these taxes are not income taxes which is what was being discussed.   I still don't know what your point is because you cannot seem to define phrases you've used that I have stated I do not know. If you cannot define what you're talking about, how it relates to the actual discussion, and why its relevant then please stop as its simply a derailment." LLC is not a federal tax designation.  It's a state-level organization. Your LLC can elect to be treated as a partnership, a disregarded entity (i.e., just report the taxes in your individual income tax), or as an S-Corp for federal tax purposes. If you have elected S-Corp, I expect that all the S-Corp rules will apply, as well as any state-level LLC rules that may apply.   Disclaimer: I'm not 100% familiar with S-corp rules, so I can't evaluate whether the statements you made about proportional payouts are correct. The IRS no longer requires that employers submit all W4 forms, but they can request a W4 for an employee at any time, and putting false information on your W4 is still a punishable offense.   I agree that having a return is like giving the Treasury Department an interest-free loan for the year, but unfortunately paying the appropriate amount of withholding tax is required.   There is some ambiguous information regarding an employer adjusting the amount of withholding, but it seems to mean that they can withhold more than the estimated rate, but never less than what is calculated using the deductions on your W4. See the link for more details: IRS Tax Withholding "The $10,400 is in the question, in two pieces.  His employer withheld $8000, and her employer withheld $2400.  Thus they paid together $10,400 in income taxes, which are deductible if you itemize deductions and choose income taxes over sales taxes (you can deduct one or the other).  There's nothing ""standard"" about the amount, though it is standard to take the income tax deduction (almost always higher than sales tax)." The argument seems to derive from the fact that state law bars cities from taxing net income. Hence the city is arguing it doesn't apply to gross income. Of course the city would also have to argue that income isn’t property. I don't think it's going to work out for them. "Do you have other income that you are not considering?  Interest and dividends would be an example, but there are all sorts of options.   Also with your witholding is it set up such that your employers have any idea of your tax bracket ultimately based on your combined incomes?  Usually what they do is take out money assuming you will be in the tax bracket of any given paycheck spread out over the course of a year.  For example, for federal I had an option to select (in an online form that fills out my W4 for me) ""married: withold at higher single rate"" and did to try and cover this fact.  Eventually I may end up having to calculate my own witholding to fix a too-low problem like yours." This question came up again (Living in Florida working remotely - NY employer withholds NYS taxes - Correct or Incorrect?) and the poster on the new version didn't find the existing answers to be adequate, so I'm adding a new answer.   NYS will tax this income if the arrangement is for the convenience of the employee. If the arrangement is necessary to complete the work, then you should have no NYS tax. New York state taxes all New York-source salary and wage income of nonresident employees when the arrangement is for convenience rather than by necessity (Laws of New York, § 601(e), 20 NYCRR 132.18). Source: http://www.journalofaccountancy.com/issues/2009/jun/20091371.html Similar text can also be found here: http://www.koscpa.com/newsletter-article/state-tax-consequences-telecommuting/ The NYS tax document governing this situation seems to be TSB-M-06(5)I. I looked at this page from NYS that was mentioned in the answer by @littleadv. That language does at first glance seem to lead to a different answer, but the ruling in the tax memo seems to say that if you're out of state only for your convenience then the services were performed in NYS for NYS tax purpose. From the memo: However, any allowance claimed for days worked outside New York State must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of- state duties in the service of his employer.