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Tax withholding definition
Tax withholding is a type of federal income tax that your employer withholds from your paycheck and sends to the IRS. Once tax season rolls around and you’ve filed your taxes, you’ll either get a refund or owe the IRS additional taxes.
The amount withheld from each paycheck depends on your salary and the information you provided on your Form W-4 when you were hired. Ideally, you don’t want too much or too little withheld – instead, you want to withhold just enough that it allows you to break even during tax season. You can do this by withholding enough to cover taxes you have to pay, but no more.
Understanding tax withholding will help you have the proper amount taken out of your paycheck. We’ll break it down for you so you can determine how much you should be withholding.
Withholding tax explained
Before determining how much to withhold for taxes, let’s clarify exactly how tax withholding works.
If you’re an employee, your employer sends a portion of your paycheck directly to the IRS. The amount that’s withheld from every paycheck goes toward the taxes you owe on that income.
You can see how much is withheld each pay period on your pay stub and how much is deducted annually on your Form W-2. That’s the form your employer sends you each year, which you use to file your annual income tax returns.
Withholding tax vs. estimated tax
For most employees, your taxes are paid throughout the year by your employer withholding them and sending them to the IRS on your behalf.
But you may owe estimated taxes if you’re self-employed or have income other than your job wages. Here are some examples of income that could be subject to estimated taxes:
- Self-employment income
- Interest income
- Capital gains
- Prizes and awards
You can avoid having to pay estimated taxes by ensuring you’re withholding enough from your paychecks.
How withholding taxes are calculated
Now you’re likely wondering how much is withheld for taxes.
This mainly depends on the information you provide on your Form W-4. This form determines how much money will be taken out of your paycheck for taxes. Here’s what to know about the process:
- You get a Form W-4 and fill in information like your marital status and whether you have any dependents.
- You list the total number of allowances you’re claiming on your Form W-4.
- You give the Form W-4 to your employer.
- Your employer uses the allowances listed on your Form W-4 to calculate how much tax to withhold.
A withholding allowance is the number you claim on your W-4 form that largely determines how much money will be taken out of your paycheck for taxes. The more allowances you claim, the less money will be taken out of your paycheck for taxes.
You can claim one, two, or three allowances depending on your personal situation:
- Claiming one allowance is usually for people who are single and have no dependents.
- Claiming two allowances is usually for people who are married and filing jointly or for people who have one dependent.
- Claiming three allowances is usually for people who have two or more dependents.
That’s a high-level view of how your tax withholding is determined, but there are other factors at play, such as the state you live in, any additional income sources, and any tax credits you may take, to name a few.
Chime tip: Claiming too many allowances can result in you owing money when you file your taxes. It’s best to talk to a tax professional to determine how many allowances you should claim based on your personal situation.
Types of tax withholdings on your paycheck
Below is an overview of the types of taxes that could come out of your paycheck, meaning taxes you must pay as an employee. Some taxes, like State Unemployment Tax (SUTA) and Federal Unemployment Tax Act (FUTA), are paid by your employer and not withheld from your paycheck.
|Tax||Employee pays||Employer pays|
|Federal income tax||✅|
|State tax, local income tax||Depends on location||Depends on location|
|Social Security tax1||6.2% (the first $160,200 of earnings in 2023)||6.2% (the first $160,200 of earnings in 2023)|
|Federal unemployment tax (FUTA)||✅|
|State unemployment tax (SUTA)||✅|
Federal income tax
This is income tax that your employer withholds from your paycheck and sends to the IRS in your name, and how much is withheld mainly depends on the information you provide on your Form W-4, such as your income, marital status, and any dependents you have.
For applicable states, state income tax is another type of income tax withheld from your pay and sent to your state by your employer. The amount withheld depends on your location, where your job is, and a few other factors based on your Form W-4.
Alaska, Florida, South Dakota, Nevada, Texas, Tennessee, and Wyoming don’t have income taxes.²
Local income or wage tax
Similar to a state tax, your city or county may impose a similar income tax to cover municipal costs like public transportation.
Social Security and Medicare taxes
In addition to federal, state, and local income taxes, employers must generally also withhold Social Security and Medicare taxes from your paychecks. Each has different rates, and the Social Security tax also has a wage base limit (or how much of your wages are subject to being taxed).
For 2023 Social Security taxes, a tax rate of 6.2% is withheld on the first $160,200. For 2023 Medicare taxes, the tax rate is 1.45%.¹
How to check your tax wittholding
If you received a large tax refund last year (due to withholding too little) or were hit with a huge tax bill from the IRS (as a result of withholding too much), you may want to adjust your withholdings.
While receiving a refund from Uncle Sam after you file your taxes may seem like free money, it just means you’ve been lending extra money to the government throughout the year that could’ve been in your pocket. And, of course, no one likes having to send a large check to the IRS.
The goal is to withhold just enough to cover the taxes you owe, no more and no less. This way, you’re likelier to break even after filing your taxes instead of getting a big refund or owing any money to the IRS.
You can use the IRS’s Tax Withholding Estimator to check your tax withholding. To get the most accurate assessment, be ready with the following information:
- Information on your main income source
- Information on any additional sources of income
- Your most recent pay stub
- Your income for the current year (per period and year-to-date)
- Your most recent income tax return
- Information on any tax credits you take
This tool can help you determine the proper amount of taxes you should have withheld from each paycheck and ensure you aren’t paying too much or too little. If you find that you need to change your withholding, simply fill out a new Form W-4 and give it to your employer’s payroll department.
Update your tax withholding to avoid large bills or refunds
While there’s no avoiding having federal taxes withheld as an employee in the U.S., you have control over how much you withhold. By getting your tax withholding right, you can help yourself avoid a tax surprise after you file your taxes.
Reviewing your withholding every year is a good idea, especially if you experience a life change like getting married, having children, or buying a home. This way, you can ensure you aren’t paying too much or too little.
FAQs about tax withholding
Still have questions about tax withholding? Find answers below.
What is the purpose of withholding taxes?
The purpose of tax withholding is to make the process of paying your taxes easier for all parties involved (the employee, the employer, and the federal government). It supports the “pay-as-you-go” or “pay-as-you-earn” income tax system in the U.S., which requires taxpayers to pay income tax periodically throughout the year instead of a larger lump-sum payment.
How much tax should I have withheld?
When it comes to how much to withhold for taxes, you’ll ideally withhold just enough to avoid getting hit with a tax bill but still owe a small amount (we’re talking $20 or less) to avoid receiving a large refund.
When should I increase my withholding?
If you were hit with a large tax bill after filing your taxes last year, you might want to decrease your withholding to avoid owing the IRS money next tax season.
When should I decrease my withholding?
If you received a large tax refund after filing your taxes last year, that’s a good indication that you may want to decrease your withholding.
How do I adjust my tax withholding?
You can adjust your tax withholding at any point throughout the year by submitting a new Form W-4 to your employer.