Income tax withholding is the process in which your employer withholds income taxes from your paycheck. Social Security and Medicare taxes, also known as the Federal Insurance Contributions Act, or FICA, are based on a flat percentage. Your federal taxes are based on several factors, including your withholding rate, number of exemptions and the amount you earn during a pay period.
Form W-4 is a form that all new employees must complete before receiving a paycheck. The IRS provides this form, but your employer keeps the document for reference. The Personal Allowance Worksheet on the top portion of Form W-4 walks you through the form by asking questions and providing scenarios. Although the worksheet is helpful, you are not required to claim the determined amount. For example, if the worksheet suggests that you claim five allowances, you are not obligated to claim five. This number is just a suggestion to make sure that you have enough withheld from your paycheck so that you aren't surprised by a large tax liability come tax time.
An allowance is a set amount of your paycheck that your employer will ignore for income tax withholding purposes. For example, as of the 2013 tax year, for each allowance you claim, $75 of your income is exempt from tax withholdings. If you claim three allowances, you can earn $225 before your boss will withhold federal taxes. Form W-4 walks you through the correct number of allowances you should claim.
Single vs. Married
The higher the number of allowances you claim, the less money is withheld from your paycheck. Married people typically have less withheld because, come tax time, they will be able to claim exemptions for two people, rather than one, which reduces the tax they must pay. But single taxpayers who expect to owe more taxes, married couples who have multiple incomes and taxpayers who want additional taxes withheld from their paycheck typically use the single withholding rate. When compared with the married rate with the same amount of income and allowances, the single withholding rate withholds more taxes than the married rate.
For example, a taxpayer who claims the single withholding rate and two allowances on $500 income has a federal tax withholding of $41.35, but if the same person claims the married withholding rate, his federal withholding is $21.50.
If you use the single withholding rate on Form W-4, you are not obligated to claim the single filing status when you file your income taxes. What you claim on Form W-4 is just for withholding purposes. This rule also applies to using the married withholding and number of allowances you claim. The only consequence is that if you withhold too much, you will receive a refund for your overpayment on your taxes, and if you withhold too little, you will owe tax at the end of the year.