Withholding question for tax experts

[Porsche-O-Phile]

My wife works part-time at a small boutique-type shop for some extra $$$ and a little "something to do" time filling on her days off. The owner of this shop is HORRIBLY disorganized in terms of her bookkeeping - doesn't know exactly how much her receivables are, how much inventory is on-hand at any given time, only a rough idea of payroll expenditures, etc.

Anyway, my wife just got her W2 from this place and realized that they didn't take out ANYTHING for federal or state, only basic SS withholding. I don't expect it'll be a huge deal (the amount she made was fairly small and I have extra $$$ withheld from my job, so we shouldn't end up owing or anything) but I'm just wondering if this is even legal.

She is paid "on the books" and not under the table or anything like that, and filled out a W4 form claiming the standard withholding allowances; it just sounds like the place just didn't look at the forms or pay attention to them, just stuck 'em in a filing cabinet.

Any thoughts?