- Tax withholding is when your employer keeps some of your salary out of your paycheck and pays your taxes on your behalf.
- Your employer decides how much money to withhold from your paycheck based on the information you share on tax forms.
- Withholding allows you to manage your tax bill gradually, rather than owe one large bill during tax season.
Among the many forms you complete when starting a new job, Form W-4, which determines your tax withholding, can be the most confusing. The answers you provide on that form will determine how much money your employer "holds back" from your paycheck to pay taxes on your behalf.
While not required, updating your withholding at the start of each tax year often makes sense. But as a taxpayer, deciding how to fill out the form can be tough, especially if you anticipate a life event, such as getting married or becoming a parent, over the next year.
Read on to learn more about how tax withholding works so that you can determine the best withholding rate for your situation — and how to update your withholding when your situation changes.
Tax withholding definition
Tax withholding refers to the income tax an employer removes from an employee’s paycheck and sends to the Internal Revenue Service (IRS) on the employee's behalf. Withholding allows the payer to manage their tax bill gradually, rather than owe one large bill come tax season.
Employers withhold several different taxes, including state and federal income taxes, Social Security taxes and Medicare taxes.
How tax withholding works
Based on the information you provide to your employer, your employer withholds a portion of your paycheck each period to pay your taxes on your behalf. You can see how much tax your employer withholds — both in a single pay period and year-to-date — on your pay stub.
At the end of the year, if the amount of income tax you withheld via your employer is more than you owe based on what you earn, you’ll receive a tax refund. If you did not withhold enough money, you’ll need to make a tax payment for the additional amount owed.
For most filers, the ideal withholding amount is as close as possible to their total tax bill; that way, they’re receiving as much money in their paychecks as possible, and they’re not going to face an unpleasant surprise in the form of a huge tax bill when they file.
That ideal amount depends on several factors, including your tax bracket, your filing status and whether you have dependents.
Federal tax withholding
You can see your federal tax withholding on your pay stubs as well as on the Form W-2 that you receive at the end of the year to file taxes. In addition to your income taxes (based on your tax rate), your federal withholding currently includes 6.2% of your income (up to $147,000 in 2022) for Social Security tax and 1.45% for Medicare tax.
The purpose of federal tax withholding is to make managing the taxes you owe the federal government easier, so that you don’t receive a large bill when you file your taxes at the end of the year.
State tax withholding
The amount withheld in your paycheck for state income tax will depend on your state’s tax rate. Some states, such as Florida and Wyoming, have no income tax and no state tax withholding. In other states, including California, Oregon, Washington, New York and Massachusetts, your state tax withholding will reflect your tax bracket in that state. Be sure to check your state's tax withholding rates.
How Form W-4 changed in 2020
In 2020, the IRS implemented some major changes to Form W-4, also known as an Employee’s Withholding Certificate, to make it more user-friendly, ensuring more accurate withholding in accordance with new tax laws.
The 2022 Form W-4 requires the following data:
- Your name, address and Social Security number
- Information on other jobs held by you or your spouse
- Your dependents (only include on the W-4 of your highest-paying job)
- Information on any non-W-4 income you receive and tax deductions you plan to take (only include on the W-4 of your highest-paying job)
Once you’ve filled out the form, your employer will use federal withholding tables to determine how much to withhold from your paycheck. There are special instructions for non-U.S. citizens filling out Form W-4. To learn more about tax withholding and how to fill out the new form W-4, check out the IRS’s Federal Income Tax Withholding Methods.
How to calculate withholding tax
If you're an employee, you don’t have to calculate your withholding tax; your employer will do that for you based on the answers you provide on your Form W-4. However, you can get a rough estimate of the amount you should withhold by starting with your income tax rate and adjusting that number based on any tax credits or deductions that you expect to take. If you’re a parent, for example, you might adjust your withholding to account for the child tax credit based on your number of dependents.
Use the IRS withholding calculator
Still not sure how much to withhold? You can use the IRS Tax Withholding Estimator at IRS.gov to help you decide. Having last year’s income tax return on hand when using the online tool may make it easier to provide some of the information needed to use the estimator.
Estimated tax vs. withholding tax
While self-employed and contract workers do not have a company taking taxes out of their paychecks automatically, they’re still responsible for paying taxes throughout the year via estimated taxes. If you filled out a Form 1099 instead of a Form W-4 at the start of your contract job or freelance project, then you must pay estimated quarterly taxes.
Taken together, your quarterly tax payments should sum up to your total tax liability for the year. As with withholding, if you don’t pay enough in quarterly taxes, you could owe a large bill at the end of the year. If you pay too much in your quarterly taxes, you can anticipate a tax refund or apply the balance to next year’s quarterly taxes.
Tax withholding FAQ
If you still have some lingering concerns about tax withholding, check out the below list of frequently asked questions. Everyone's financial situation is different, so consult with a tax professional if you're not sure about your withholding amounts.
When should I increase my withholding?
Common situations in which it might make sense to increase your withholding include if you’ve gotten a raise or taken on a second job. Anytime your income increases enough to move you into a higher tax bracket, increasing your withholding may make sense.
When should I decrease my withholding?
Common situations in which it might make sense to decrease your withholding include when you become eligible for a large tax credit, such as after having a baby or being unemployed for part of the year. In general, when your taxable income goes down, it may make sense to decrease your withholding.
How do I adjust my tax withholding?
You can adjust your tax withholding at any time, and you may want to do so if your gross income changes or if you find yourself owing a large tax bill. To adjust your tax withholding, simply fill out a new Form W-4 and submit it to your employer.
Each employer may have a different procedure for handling this, so if you’re not sure how to submit it, ask your human resources (HR) department.
Keep in mind that any new withholding will go into effect for future paychecks, so if you adjust your withholding late in the year, it may not have as large an impact in that tax year.
Be prepared for tax season
Tax withholding allows your employer to send part of your paycheck to the IRS on your behalf. Understanding withholdings and withholding the right amount allows you to take home the largest paycheck possible, without accumulating a big tax bill when you file.
If your finances are more complex, a tax professional can walk you through your filing questions and help you prepare for a smooth tax season, while meeting your financial goals.