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What is Tax Withholding? How It’s Calculated

Greg Sandler • December 17, 2024

Are you wondering: What is tax withholding? It’s the amount withheld from each paycheck and depends on your salary and the information you provided on your Form W-4 when hired.

You don’t want too much or too little withheld. Ideally, withhold just enough to break even during tax season.

Understanding tax withholding will help you determine how much to withhold from your paycheck. We’ll break it down for you so you can calculate this yourself.

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Withholding allowances explained

“Withholding tax” represents a portion of your total wages and applies to most workers in the United States. If you’re an employee, your employer sends a portion of your paycheck directly to the IRS. The amount withheld goes toward the taxes you owe on that income.

Your withholding influences what you owe, if anything, at the end of the year. If too much is withheld, you receive a refund. If not enough is withheld, you might owe taxes when filing your annual tax return.

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 — sent by your employer each year to help file your annual income tax returns.

How withholding taxes are calculated

Employers and payroll providers use IRS tables to help determine your withholding amount. Withholding taxes in the United States are calculated using a complex formula that includes your:

  • Base salary
  • Filing status
  • Number of dependents
  • Additional withholding requests
  • Pay frequency

The amount withheld for taxes depends on the information you provide on your Form W-4. This form determines how much money will be taken from your paycheck for taxes. Here’s what to know about the process:

  • Fill out a Form W-4 with information like your marital status and number of dependents. Here’s how to fill out Form W-4 if you need help.
  • List the total number of allowances you’re claiming on your W-4.
  • Give the completed form to your employer.
  • Your employer uses the allowances listed to calculate how much tax to withhold.

Number of allowances

The number of withholding allowances you claim on your W-4 form 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 typically for singles with no dependents.
  • Claiming two allowances is usually for married couples filing jointly or for individuals with one dependent.
  • Claiming three allowances is for couples or individuals with two or more dependents.

Other factors determining your withholding taxes include your state of residence, additional income sources, and any tax credits you are eligible to claim.

Chime tip: Claiming too many allowances can result in 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 own personal situation.

Types of tax withholdings

A typical U.S. paycheck includes several types of tax withholding. Federal tax withholding includes income tax, social security tax, and Medicare tax.

Beyond federal tax withholding, you will likely see state income tax, local income tax, state disability insurance, and state unemployment insurance withheld from your paycheck.

While not technically taxes, employees may opt for voluntary deductions to cover costs such as health insurance premiums, retirement contributions, life insurance premiums, or contributions to a health savings account.

Here are some of the types of taxes that could come out of your paycheck as an employee:

Federal income tax

Your employer withholds federal income tax from your paycheck and sends it to the IRS in your name. The amount withheld depends on the information you provide on your Form W-4, like your income, marital status, and number of dependents.

State tax

For applicable states, state income tax is withheld from your pay and sent to your state tax office by your employer. The amount withheld depends on your location, your job, and a few other factors based on Form W-4. Alaska, Florida, South Dakota, Nevada, Texas, Tennessee, and Wyoming don’t have income taxes.¹

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 general, employers also withhold Social Security and Medicare taxes—each with different rates.

The Social Security tax has a wage base limit that specifies how much of your wages are subject to taxation. In 2024, for example, a tax rate of 6.2% is withheld on the first $160,200. For Medicare taxes, the tax rate is 1.45%.²

How to check your tax wittholding

You can review your pay stub to check your current tax deduction amounts and compare your gross wages – before deductions – to your take-home pay. Consult a tax professional or accountant to review withholdings to align with your specific needs.

If you received a large tax refund last year, it may have been due to withholding too little. Likewise, if you were hit with a huge tax bill from the IRS, it may result from withholding too much.

Tax brackets can influence your withholding needs and tax liability, so it’s important to factor them into your tax planning decisions each year.

The goal is to withhold just enough to cover the taxes you owe, no more and no less. This way, you’re more likely to break even after filing your taxes — instead of getting a big refund or owing any money to the IRS.

Withholding estimator tool

You can use the IRS Tax Withholding Estimator Tool to determine if your withholding is correct based on your taxable income, filing status, and deductions.³

This tool can help determine the proper amount of taxes you should have withheld from each paycheck and helps to 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.

Save time and money

Understanding tax requirements, along with employer and employee reporting obligations can save you time and money. Figure out your withholding strategy and potentially reduce your tax burden.

Learn more about how you can benefit from tax deductions and credits.

FAQs

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 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 should 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 W-4 to your employer.

Get paid when you say.™

Get up to $500 of your pay before payday.^
No mandatory fees, no credit check, and no interest.~

Learn More