Withholding Tax: Everything You Need to Know

Pay attention to withholding tax because if too little is withheld, you may owe the IRS come tax time.
Alana BensonNov 2, 2021

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Withholding tax may sound like a new concept, but there’s a good chance you’ve already dealt with it: As the name implies, it is withheld from most employees’ paychecks. The important thing is to make sure you’re having the right amount taken out.

What is withholding tax?

Withholding tax is the income tax your employer withholds from your paycheck and sends to the IRS on your behalf. If too much money is withheld throughout the year, you’ll receive a tax refund. If too little is withheld, you’ll probably owe money to the IRS when you file your tax return.

Who pays withholding tax?

Most employees are subject to withholding tax. Your employer is the one responsible for sending it to the IRS.

In order to be exempt from withholding tax you must have owed no federal income tax in the prior tax year and you must not expect to owe any federal income tax this tax year.

Understanding withholding tax

How much money is withheld from your paycheck depends on the Form W-4 that you'll fill out and give to your employer when you start your job. Information on that form includes:

  • Your income.

  • Your filing status (if you’re single, married, etc.).

  • Whether you have your employer withhold additional amounts.

One thing to note: If your filing status is “married filing jointly,” you’ll likely have fewer tax dollars withheld than if you file as “head of household.”

Withholding tax is made up of federal, state, local and FICA taxes. FICA taxes (also called payroll taxes) include a 6.2% Social Security tax and a 1.45% Medicare tax. Learn more about FICA tax.

How to check and change your withholding tax

The IRS recommends checking your withholding for lots of reasons, including if you work a seasonal job, claim the child tax credit or had a large refund or tax bill last year. To see whether you may need to change your withholding, you can use the IRS’s Tax Withholding Estimator. To use the tool, you’ll need to have the following for yourself (and your spouse, if you’re married): your most recent pay stubs, information about other sources of income and your most recent income tax returns. You can also use our withholding calculator below:

If you need to change your withholding, the process is fairly straightforward: Just fill out a new Form W-4 and submit it to your employer. Withholding tax comes out of your paycheck throughout the year, so it’s better to make changes to your withholding sooner rather than later.

Withholding tax vs. estimated tax

Unlike withholding tax, estimated taxes are not paid by an employer. Estimated taxes are paid by people who earn income that is not subject to withholding. For example, someone who is self-employed may need to estimate their tax liability and make payments quarterly.

» Are you your own boss? Learn more about estimated taxes.

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