How Much Are Federal Tax Withholding Allowances?

Every year when April rolls around, taxpayers have just a couple of weeks left before they have to file their income tax returns by the filing deadline on April 15. You may be an early-bird filer each year by finishing this task as early as January. If that's the case, it’s likely that you’re expecting a tax refund, which you may have already made plans to spend. Often, the difference between taxpayers who excitedly receive a refund and taxpayers who not-so-excitedly owe more income tax by the April due date is the way each of these two groups claim their federal withholding allowances. If you fine-tune the total number of allowances you are claiming, you may be able to avoid the sticker shock of a large tax bill balance at the end of the year.

Withholding Allowances for Federal Tax

In tax terms, an “allowance” is a number that you submit to your employer for calculating the amount of money that is withheld from your paychecks. Allowances aren’t dollar amounts or percentages of your income; they are actual numbers such as one, two, three, etc. The more allowances you claim, the less money your employer withholds from your paychecks. And the fewer allowances you claim, the more money your employer withholds. You don’t have to play a guessing game and arbitrarily choose this number because the IRS provides worksheets that help guide you through the process of calculating your withholding allowance.

IRS "Pay as You Go"

In the words of the IRS, the U.S. federal income tax system is “pay as you go, so you won’t owe.” Instead of presenting you with a year-end bill for the total amount of income tax you owe, the IRS collects small payments from you throughout the year against this total amount. And it does it in one of two ways, depending on how you get paid. If you work for an employer, you’ll make these incremental payments through paycheck withholding deductions. If you are self-employed or you receive other compensation that doesn’t come from an employer, such as Social Security benefits or pension payments, you’ll make quarterly tax payments. By making periodic payments throughout the year, which pay down your total tax liability, you’ll ideally pay only a small balance at the end of the year. But if you’ve overpaid your tax bill, you’ll be among approximately 70 percent of taxpayers who receive refunds.

Importance of Form W-4

As a new hire, you filled out IRS Form W-4 (Employee’s Withholding Allowance Certificate), which gave your employer the number of allowances you were claiming. Or you may not be a newly hired employee but your financial situation recently changed, to cite a few examples, because of a change in your filing status, your income (or your spouse's income) or even new tax laws. This change may have prompted you to fill out a new W-4 to tweak your number of allowances. Your W-4 sets the tax withholding ball in motion as it passes from you to your employer, and back to you again when it’s time to file your tax return.

Warning

If you're self-employed or you receive other non-employee compensation or distributions, you will not fill out a W-4, which means you won't have an employer to withhold income tax payments from your earnings. It's your responsibility to make your estimated quarterly tax payments.

Figuring Your Federal Withholding Allowance

Three worksheets are included with the W-4, which help you compute the number of withholding allowances to claim. If your employer didn’t give you the worksheets with the W-4, visit IRS.gov/forms and you’ll find them there. You’ll only need to fill out the worksheet(s) that apply to your financial situation.

  1. Personal Allowances Worksheet. Your filing status and the number of jobs that you and your spouse have determine the allowances you claim on Lines A through D. Line E provides for additional allowances if you have eligible children. If you have eligible dependents other than your children, you’ll enter the number of those allowances on Line F. The IRS has specific eligibility guidelines for children and other dependents, which you can find in IRS Publication 505 (Tax Withholding and Estimated Tax) at IRS.gov.
  2. Deductions, Adjustments, and Additional Income Worksheet. Only taxpayers who itemize their deductions, claim certain income adjustments or have a large amount of non-wage income have to fill out this worksheet. Publication 505 defines the IRS-allowable deductions you can itemize.
  3. Two Earners/Multiple Jobs Worksheet. As you’re filling out the Personal Allowances Worksheet, Line H may direct you to the Two Earners/Multiple Jobs Worksheet if you have more than one job or if you’re married filing jointly with your spouse and both of you work. If you don’t fill out this worksheet, you may not have enough money withheld from your paychecks, which will result in more tax you’ll unexpectedly owe by the filing deadline.

Your Employer's Withholding Responsibilities

When you submit a W-4 to your employer with the withholding allowances you claim, your employer determines the corresponding dollar amount of income tax to be withheld from your paychecks by using the method of his choice. The two most commonly used methods are the percentage method and the wage bracket method. The IRS provides withholding tables to employers for each of these methods, which include data such as the frequency of payroll periods, filing status and income.

  1. For the percentage method, an employer finds an employee’s filing status and corresponding income in the table and then lists a baseline withholding amount plus a certain percentage of the employee’s income to add to the baseline amount. An employer can use this method regardless of how many withholding allowances an employee claims or the amount of an employee’s taxable wages.
  2. For the wage bracket method, an employer uses columns in the IRS table that correspond to the payroll period, marital status, taxable wages and the number of withholding allowances for each employee.

How to Adjust Your Withholding

All you have to do to adjust the number of your withholding allowances is submit a new Form W-4 to your employer. The IRS offers some heads-up reasons for performing a "paycheck checkup” – if you receive an inordinately high tax bill balance at the end of the year; if you experience changes to your family life or job situation; or if there's been recent tax legislation. By using the IRS online tax withholding calculator, you can proactively monitor your withholding status and make any needed changes.

IRS Online Tax Withholding Calculator

From IRS.gov, click the search icon and enter “tax withholding calculator” to access this tool. You won't have to enter confidential personal information such as your address, Social Security Number or banking information. And the IRS doesn't store the information you provide or your results online. Have your recent pay stubs and your last tax return in hand for the information you need to enter in the calculator.

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About the Author

Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.


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