The Internal Revenue Service indicates that it sent out almost 112 million tax refunds by November 2018 for returns that were filed that year. And that’s a good thing, right?
Yes and no. Although a portion of those IRS payments were the result of taxpayers qualifying for refundable tax credits, the IRS was just sending back overpaid taxes to many of them. These taxpayers contributed more in withholding from their paychecks all year than was necessary.
Having less tax taken out of your paycheck could put more money in your pocket each month, but depending on your personal situation, you may have to settle up with Uncle Sam when you file your taxes.
The Anatomy of a Refund
If you work for a paycheck, you know that a percentage of your earnings is regularly subtracted and forwarded to the IRS each pay period. The IRS then credits the payments to your Social Security number as taxes paid. When you prepare and file your tax return, the amount you owe might be more or less than what you’ve accumulated in your IRS tally of taxes you’ve paid all year.
In fact, withholding almost never exactly matches what you end up owing at the end of the year. If you paid too much, you’ll receive a refund, but the IRS doesn’t pay you interest for the courtesy of holding on to your money for you all year.
So it begs asking: What happens if you have less tax taken out of your paychecks? How can you do that, and how can you calculate whether your withholding is enough?
What Tax Percentage Is Withheld?
So, what is the percentage of taxes taken out of a paycheck? Unfortunately, there’s no one-size-fits-all answer to this one, at least not when it comes to income taxes. Medicare and Social Security taxes are something else.
Medicare taxes are always withheld at 1.45 percent of every employee’s pay while the employer also contributes 1.45 percent for a total of 2.9 percent. Social Security taxes are almost always withheld at 6.2 percent of your pay, again with your employer matching and contributing the same amount.
But the Social Security tax is only paid on earnings up to $132,900 as of 2019, called a “wage base.” Any income you earn over this threshold isn’t subject to the tax. So if you reach the wage base in October, you won’t have the same percentage of Social Security taxes withheld as someone who’s earned $75,000. That taxpayer will still be paying in, but you won’t.
There's the Additional Medicare Tax
This one isn’t withheld until an individual’s earnings hit $200,000, assuming she’s single. The Additional Medicare tax kicks in at just $125,000 if she’s married and filing a separate return, and it’s $250,000 for married couples who file jointly.
This tax is another 0.9 percent over and above the regular Medicare amount of withholding. Employers don’t have to share in it. So again, the guy earning $201,000 will pay a different percentage in withholding than the one earning $199,000 when the Additional Medicare tax is added in.
How Much Is Federal Tax Withholding?
Percentage statistics really scatter all over the board when it comes to income tax, which is the federal tax withholding that can result in a refund. This percentage depends on numerous factors: whether you’re married, how many jobs you have, how many dependents you have and how many tax credits you qualify for, among other things.
You see where this is going. Joe Taxpayer might have 5 percent withheld, while Mary Taxpayer has 12 percent withheld. It all comes down to the personal circumstances upon which an individual's income taxes are based.
How to Get Less Withheld
Fortunately, paycheck tax withholding calculators abound all over the internet, including one offered by the IRS. That’s the good news. You can just plug in your personal information, and the calculator will tell you how much should be withheld from your pay.
It’s a simple matter of going back to the drawing board and submitting a new Form W-4 to your employer if you realize you’re having too much withheld. The form also comes with instructions to help you figure it all out, assuming you don’t want to go online and have a website figure it out for you. Your employer will base your withholding on the information you include on this form.
You’re not limited to submitting a W-4 only when you begin a new job. You can give your employer a new, updated one whenever you like, and it’s recommended that you do so whenever your situation changes, such as because you’ve married or had a child.
How Do Allowances Reduce Withholding?
The most important information included on your W-4 is the number of allowances you want to claim. The more you claim, the less income tax will be withheld from your paychecks. The number you should claim is highly dependent on all those factors like your dependents or lack of them, your marital status and how many jobs you hold down.
So how much is each allowance worth? That depends on your filing status. Are you single or married? It also depends on how much you earn.
For example, each allowance was worth $913 a year in the 2018 tax year, reported on the tax return you’ll file in 2019, if you’re single and you earned between $42,401 and $86,200. It’s also worth $913 if you’re married and file a joint return and your joint income was $88,951 to $176,550. In other words, the value of each allowance isn’t the same for everyone.
But you can at least use this number to roughly determine whether you can safely claim more allowances than you did last year. Just take the amount of the refund you received last year and divide it by the annual value of each of your allowances. Maybe you received a $3,000 refund, and each allowance is worth $913 to you. That works out to 3.28, so you should safely be able to claim three additional allowances. And in case you’re wondering, that works out to about $228 more a month in your take-home pay.
Claiming More or Less Allowances
So now that you have an idea of how many allowances you should claim, you might be tempted to claim one or two more – which would result in less taxes being withheld from your paychecks – or one or two less, which would mean paying the IRS more than you have to pay. You can build up a nice cushion so you can be sure you won’t owe anything come April, and then take the overage back as a tax refund, or you can claim as many allowances as you want to and deal with any fallout when you file your tax return. So what do you do?
Ask yourself how you’re going to pay any tax due when you file your return if you haven’t had enough withheld from your pay. And keep in mind that you could be subject to interest and penalties charged by the IRS because you didn’t pay enough in all year to ultimately meet your tax debt. Having less withheld from your pay doesn't mean you don't owe the IRS more. It just means that you're deferring your tax debt until April.
Again, it comes down to your personal situation. But you should be at least somewhat on target if you claim one allowance each for yourself, your spouse and each of your dependents.
- TurboTax: Fatten Your Paycheck and Still Get a Tax Refund
- IRS: IRS Withholding Calculator
- Paycheck City: How Is Federal Withholding Calculated?
- IRS: Filing Season Statistics for Week Ending November 23, 2018
- Automatic Data Processing: Social Security Wage Base for 2019 Announced
- Society for Human Resource Management: 2019 Payroll Taxes Will Hit Higher Incomes
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.