Resolving QuickBooks Payroll Not Deducting Taxes Issue With Causes & Solutions to Fix

Last Updated on April 10, 2025

Is your QuickBooks Desktop payroll not calculating federal or state taxes? If yes, then it is a condition that ‘QuickBooks payroll not deducting taxes’ is very common among many users who already have payroll facilities enabled within QuickBooks. Such a condition can be caused by numerous reasons, such as incorrect employee tax configuration or the absence of current updates in the software. The tax deduction condition can hinder the users from processing the payroll of employees correctly, and it must be resolved at the earliest. In this section, we will cover the best solutions to permanently fix the payroll tax deduction issues.

Are you unable to fix the QuickBooks payroll not deducting taxes error? You can speak to our dedicated experts by dialing our toll-free number 1.855.738.2784. These Accounting Helpline Experts are all well-trained to understand your concerns and help you fix the software update issues instantly.

What is the QuickBooks Payroll Not Deducting Taxes Issue?

‘QuickBooks payroll not deducting taxes is an issue in the QB application where you have an active payroll subscription, yet the taxes are not being deducted. A scenario of QuickBooks payroll not deducting taxes is very common for most users who already have payroll features integrated into QuickBooks. The problem can occur due to numerous reasons, such as incorrect employee tax configuration or the absence of recent updates in the software.

The tax deduction problem can hinder users from processing the employee payroll in the right way and must be addressed immediately. Here in this guide, we are going to provide the best remedies to fix the payroll tax deduction issues permanently.

Causes of ‘QuickBooks Payroll Not Deducting Taxes’ Error

There are several reasons why QuickBooks payroll taxes aren’t being taken out. You can better understand this issue by knowing these reasons. Below are the reasons why taxes are not deducted by QuickBooks payroll:

1. Perhaps the QuickBooks payroll, tax, or employee item settings are misconfigured.
2. The annual compensation of the employee is higher than the salary cap.
3. Your version of QuickBooks Desktop may be outdated or discontinued.
4. The latest updates are missing from the QuickBooks payroll tax tables.
5. The employees don’t qualify for the taxable wage base, and the gross wages from their latest payroll are too low.
6. Both federal and state income taxes have a “Do Not Withhold” status for the employee, and the filing status is incorrect.
7. Another potential reason for QB payroll not deducting taxes is that your subscription status is inactive.

These are the primary reasons QuickBooks is unable to withhold taxes on paychecks. Let’s move on to the next section to observe how to resolve this issue successfully.

Solutions to Fix QuickBooks Payroll Not Deducting Taxes Error

There can be several ways to fix this payroll error. But we will be giving you the easiest steps in this section. By following these steps, you can fix the issue of not deducting taxes. Here are the steps that we will be talking about briefly:

1. Updating QuickBooks Desktop to the Current Version
2. Updating QuickBooks Payroll Tax Table 
3. Reverting the Employee’s Paycheck
4. Reviewing the Employee’s Tax Setup & Status of Filing
5. Verifying the Payroll Subscription
6. Studying Employees’ Withholding Report
7. Checking the Annual Limit for the Employees

These are some solutions that you can implement to fix the ‘QuickBooks desktop payroll not calculating federal or state taxes’ issue. Let’s now look at each of these solutions in detail.

Solution 1: Updating QuickBooks Desktop to the Current Version

Old QuickBooks sometimes triggers some payroll issues in QuickBooks. So it’s required that you update your QuickBooks to the latest release. The ways of updating QuickBooks are described as follows:

1. Initially, you must open QuickBooks Desktop.
2. Now, click the help option.
3. Next, visit the update QuickBooks option.
4. After that, you will require clicking on the reset updates option as well as opting for the get updates so as to proceed with the download.
5. You now have to restart QuickBooks. There will be an installation prompt on the screen.
6. Follow the instructions on the screen that pop up to install the updates properly.

The last step is to reopen the company files and check whether the taxes are being deducted or not. You can also check out the next solution if this doesn’t help.

Solution 2: Updating QuickBooks Payroll Tax Table

You can also download the payroll tax table updates as guided below after installing the QuickBooks Desktop updates. This can be the reason why QuickBooks payroll is bot deducting taxes. The steps to update the QB payroll tax table are as follows:

1. Open QuickBooks Desktop, select Get Payroll Updates from the Employees menu, and then click Download Entire Update.
   
2. Update QuickBooks Payroll Tax Table with the Latest Version
3. Furthermore, click on Update and proceed to wait for the information window to appear, which will indicate that the download is complete.

Updating the payroll tax table might help you fix the component that is responsible for deducting taxes. Now, you need to revert the paychecks to get them fixed.

Solution 3: Reverting the Employee’s Paycheck

Reverting the employees’ paychecks may help you fix the ‘QuickBooks payroll not deducting taxes’ issue. In order to calculate the taxes and update the payroll, you have to reverse the employee’s paycheck according to the steps below:

1. First, open the Employees tab in QuickBooks, then select Pay Employees, and then Scheduled Payroll.
2. Then, choose Resume Scheduled Payroll. Now, right-click on the employee whose changes are to be reversed, and select Revert Paychecks.
3. In order to see the outstanding paycheck of the employee, find the yellow highlight and click Open Paycheck Detail.
4. Finally, complete the payroll information and Save & Close.

You can easily cancel or delete the paycheck of the employee and redo it if you have already issued it to them. If this does not resolve your error, you can move to the next solution.

Solution 4: Reviewing the Employee’s Tax Setup & Status of Filing

The employee’s paycheck will not be held back from taxes if their file status on the federal form W-4 is Exempt. You will need to update the file status as per the steps mentioned below to fix the issue, ‘Payroll is not taking taxes out of the payroll check.’

1. Choose Employee Centre from the Employees choice in QuickBooks. Double-click each employee’s name individually.
2. Check the Pay Frequency is correct by going to Payroll Info on the left.
3. Having clicked on the Federal tab and reviewed the Allowances and Filing Status columns, click the Taxes button.
4. Adjust as necessary and click OK twice if the employee’s filing status is displaying as Exempt.

You can choose to run the payroll again and ensure QuickBooks is properly deducting taxes upon adjusting the filing status. You can move to the next solution if this does not help.

Solution 5: Verifying the Payroll Subscription

An invalid payroll subscription can also prevent QuickBooks from deducting taxes. In this case, you must verify the validity status of payroll with the aid of the following steps:

1. You must close all your company files and reboot your computer.
2. Then, open QuickBooks, click Employees, choose My Payroll Service, and then click Manage Service Key.
3. Your Service Name and Status should be correct and Active.
4. Now you have to choose Edit and confirm the service key number. If it is wrong, type the correct service key.
5. Last, choose Next, unmark the Open Payroll Setup box, and then choose Finish. This will assist you in downloading the full payroll update.

If the QuickBooks payroll taxes are not being deducted due to an invalid subscription, these solutions can help you fix the error. If verifying the payroll subscription does not help, you can move to the next solution.

Solution 6: Studying Employees’ Withholding Report

Incorrect year-to-date or quarter-to-date wage or tax data can also influence payroll processing. If this data is examined, you will fix this issue if you realize that the QuickBooks payroll fails to withhold taxes. Given below are solutions to confirm the status of every employee who is activated in the withholding report:

1. First, you need to click the Reports, after that click the Employee Withholding within the section of Employees and Payroll.
2. Then, choose the columns that suit you by clicking on the Customize Report option.
3. To save, click the items that you want to appear on your report in the Display List section and then OK.
4. Then ensure that the state, municipal, and federal taxes of your employees are properly configured.
5. To make changes to the data, go to the Employee Info window, click the employee’s name, and the window will open on the screen with the updated information.
6. To reach the Federal, State, and/or Other tabs, go to Payroll Info, then choose the Taxes tab.
7. Last, ensure the employee is properly taxed and close the file.

After you finish, check to determine if the tax deduction problem in QuickBooks payroll still exists. Go to the next solution and check the annual limit if the issue persists.

Solution 7: Checking the Annual Limit for the Employees

Run the tax and wage summary report to confirm the yearly maximum if taxes were not withheld by your QuickBooks payroll. If QuickBooks is nearing this limit, you might encounter issues when withholding or deducting taxes. Follow these guidelines below to review and set the yearly limit in an effort to correct this.

1. Right-click on the payroll item you wish to modify after choosing Lists and Payroll Item List from the top menu bar.
2. Once you choose Edit Payroll Items, the Limit Type screen will appear when you scroll down to the Next screen.
3. Ensure there are no issues with the box at the bottom as well.
   • Payroll for the employee ought to stop calculating at the limit if there are no issues.
   • You need to adjust the amount if the limit is in error.
4. Now, in the Limit Type section, ensure that you choose the right option from the list below:
   • Annual – Reset annually
   • Monthly – Reset monthly
   • One-time limit
5. If the option is mistakenly chosen, you can click Finish after adjusting the default limit or Limit Type choice to your preference.

Finally, you need to re-run the QB payroll after reviewing the yearly cap. This solution can help you resolve the error if QuickBooks payroll taxes are not being taken out.

Summing It Up!

Finally, we have reached the last leg of the blog. ‘QuickBooks payroll taxes not deducted suddenly’ is a sign of some issues. You need to fix this as soon as possible or else you won’t be able to use the payroll feature. For QuickBooks Payroll not deducting taxes, we have mentioned some great solutions to get rid of this. For your reference, we have also created a memory table.

This memory table will help you in memorising the key details related to the ‘QuickBooks federal taxes not being taken out’ issue.

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Edward Martin

Edward Martin is a Technical Content Writer for our leading Accounting firm. He has over 10 years of experience in QuickBooks and Xero. He has also worked with Sage, FreshBooks, and many other software platforms. Edward’s passion for clarity, accuracy, and innovation is evident in his writing. He is well versed in how to simplify complex technical concepts and turn them into easy-to-understand content for our readers.