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A withholding allowance is an exemption that reduces how much income tax an employer deducts from an employee’s paycheck and transmits to the IRS on their behalf.
This exemption from withholding is tied to the personal exemption, a federal tax break that was available to all taxpayers, regardless of their expenses, through 2017.
The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated personal exemptions for the period from 2018 to 2025. As a result, the withholding allowance has no current practical relevance. But that could change in 2025 when the TCJA changes end.
For now, it is no longer used on Form W-4: Employee’s Withholding Certificate, which the Internal Revenue Service (IRS) completely redesigned. Employees in the United States fill out and submit Form W-4 to their employers so that their employers know how much to withhold from workers' paychecks.
Before 2018, an individual was required to fill out Form W-4 when hired by an employer. The form required certain personal information, such as their name and Social Security number and the number of allowances to be made.
The employer used the W-4 to determine how much of an employee’s pay to subtract from their paycheck so as to remit to the tax authorities. The total number of allowances claimed was important—the more tax allowances claimed, the less income tax would be withheld from a paycheck; the fewer allowances claimed, the more tax would be withheld.
The withholding amount was based on filing status—single or married but filing separately, married and filing jointly, or head of household—and the number of withholding allowances claimed on the W-4.
It was important to claim the right number of allowances to avoid trouble when filing taxes or to keep from giving the government an interest-free loan by paying too much in taxes (only to receive the amount back later as a refund).
Much of how things worked before the passage of the TCJA is the same today. Individuals still fill out a W-4, employers still use it to calculate how much of an employee's paycheck should be taxed, and tax filing status is still key.
But the IRS revamped and simplified the W-4 form and how taxpayers should determine their withholding. Now, withholding amounts relate to whether an individual has multiple jobs or a spouse who works, what credits they can claim, and other adjustments.
For example, withholding is affected if:
Fortunately, you can use the IRS Withholding Calculator to see whether you're having the right amount withheld from your paycheck.
An individual can be completely exempt from withholding, but it’s not easy to receive that status. You can claim the exemption from withholding only if you had a right to a refund of all federal income tax withheld in the prior year because you didn’t have any tax liability and you expect the same for the current year. You simply write “Exempt” on Form W-4.
This must be done annually; the exemption doesn’t automatically carry over.
A new Form W-4 must be filed with a taxpayer’s employer whenever the taxpayer's personal or financial situation changes (e.g., they get married, have a baby, or their spouse enters or leaves the workplace). The new withholding goes into effect no later than the first payroll period ending 30 days after giving the revised form to the employer. The employer may implement it sooner but isn’t required to do so.
It’s also possible to request that a specific dollar amount be withheld in addition to other tax withholdings. This may be helpful for taxpayers receiving a year-end bonus or for those who simply want to boost withholding near the end of the year (perhaps to cover taxes on investment income, such as capital gain distributions made at the end of the year). Individuals can also request that an additional amount be withheld with Form W-4.
Be sure to file a new Form W-4 if your personal or financial situation changes. If you don't, you could end up having too little money withheld throughout the year, which would affect what you must pay come tax time.
The short answer: You are likely to owe money at tax time. And if you have significantly underpaid your taxes during the year, you may have to pay a penalty when you file your annual tax return. If you do not have enough withheld from your paycheck, you can request that your employer withhold an additional dollar sum.
If, on the other hand, you have more income withheld than you should, you will receive a refund after you file your annual income tax return. Receiving a refund isn’t necessarily a good thing—it represents money you could have used throughout the year to pay your bills or invest for your future financial well-being.
Many people think it’s better to have less money withheld from their paychecks to pay taxes. Alternatively, others prefer to play it safe and overpay, mindful that they will get a refund later on down the line. Neither of these approaches is smart. The best option is to fill out Form W-4 as accurately as possible. Doing so will ensure that you don’t get hit with a nasty tax bill out of the blue or essentially give the IRS an interest-free loan.
The withholding amount generally depends on a taxpayer's filing status, number of jobs, other income, and whether they have dependents.
After an employee fills out Form W-4, it is up to the employer to calculate how much to withhold from each paycheck for federal income taxes. Payroll software should have a built-in calculator to work all this out. Alternatively, employers can consult IRS Publication 15-T: Federal Income Tax Withholding Methods.
Ensuring that the right amount of money is withheld from each paycheck to pay federal income taxes is important. Employees who don't fill out Form W-4 carefully can get hit with a nasty tax bill out of the blue or essentially end up lending the IRS money free of charge.
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Description Related TermsA qualified higher education expense is a tax credit for the parents of students attending a college or other post-secondary institution.
A filing extension is an exemption made for taxpayers who are unable to file their federal tax return by the regular due date.
A flow-through entity is a legal business entity that passes income to the owners and/or investors of the business. It's sometimes referred to as a disregarded entity.
A widow(er)'s exemption is one of several forms of state or federal tax relief available to a surviving spouse in the period following their spouse's death.
Passive income is earnings from a rental property, limited partnership, or other enterprise in which a person is not actively involved.
Tax liability is the amount an individual, business, or other entity is required to pay to a federal, state, or local government.
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