When the company withholds on your behalf, all they are doing is sending the federal (and state if applicable) governments estimated taxes you owe. Theoretically, you could not have anything withheld (which you can kinda sorta do by fiddling your withholding declaration when you start working at any new job) and simply write a personal check for the taxes owed when you file your taxes the next April. Note this assumes you are saving enough to pay the entire tab when it comes due!
When your employer does not withhold, you are left with a tax obligation toward which you have had nothing withheld. Here’s what’s happening (I’ll use very oversimplified numbers):
Let’s say previously your gross pay for a month was $1,000 and your net (“take-home”) was $800 with $200 withheld. If your actual tax liability for that month ended up being $200, you owe nothing when you file.
Now let’s say you’re getting that “same” pay as an “advance” with no withholding. Your company tells you “Your take-home pay stays the same” and writes you a check for $800. You owe taxes on income of $800 for that month. Nothing has been withheld. Assuming the same 20% tax rate I used above, you now have a tax liability of $160.
As you are being paid this way, you are building up a tax liability. Reality is that, using the example numbers, you are being paid $640 (if you net out your no-more-withholding liability) for work you used to be paid $800 (net after withholding) for. You are subsidizing your company’s on-going existence by taking an effective pay cut. (I suspect they are also fiddling both your and their FICA (Social Security) contributions as well – if that’s true, you may have a FICA obligation as well as a plain vanilla income tax liability.)
If you’re ok with the effective pay cut and the accumulating tax liability, be sure you save up to pay those taxes next April.
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