Tax Withholding

The federal income tax is a pay-as-you-go tax. There are two ways to pay as you go.

Withholding. If you are an employee, your employer probably withholds income tax from your pay. Tax may also be withheld from certain other income — including pensions, bonuses, commissions, and gambling winnings. In each case, the amount withheld is paid to the IRS in your name.

Estimated tax. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. People who are in business for themselves generally will have to pay their tax this way. You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rent, and royalties. Estimated tax is used to pay not only income tax, but self-employment tax and alternative minimum tax as well.

Salaries and Wages

Income tax is withheld from the pay of most employees. Your pay includes your regular pay, bonuses, commissions, and vacation allowances. It also includes reimbursements and other expense allowances paid under a non-accountable plan. See Supplemental Wages, later, for more information about reimbursements and allowances paid under a non-accountable plan.

• Publication 525, Taxable and Nontaxable Income
• Publication 531, Reporting Tip Income

Determining Amount of Tax Withheld Using Form W–4

The amount of income tax your employer withholds from your regular pay depends on two things.

• The amount you earn.
• The information you give your employer on Form W–4.
• Form W–4 includes three types of information that your employer will use to figure your withholding.
  • Whether to withhold at the single rate or at the lower married rate.
  • How many withholding allowances you claim. (Each allowance reduces the amount withheld.)
  • Whether you want an additional amount withheld.

Note: You must specify a filing status and a number of withholding allowances on Form W–4. You cannot specify only a dollar amount of withholding.

For help with your withholding, you may use the Withholding Calculator. This easy-to-use calculator can help you figure your federal income tax withholding so your employer can withhold the correct amount from your pay. This is particularly helpful if you’ve had too much or too little withheld in the past, your situation has changed, or you are starting a new job.

New Job

When you start a new job, you must fill out IRS Form W–4 and give it to your employer. Your employer should have blank copies of the form. If you need to change the information later, you must fill out a new form.

If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld. You may be able to avoid over-withholding if your employer agrees to use the part-year method. See Part-year Method in Chapter 1 of Publication 505, Tax Withholding and Estimated Tax  for more information.

Changing Your Withholding

Events during the year may change your marital status or the exemptions, adjustments, deductions, or credits you expect to claim on your return. When this happens, you may need to give your employer a new Form W–4 to change your withholding status or number of allowances.

If the event changes your withholding status or the number of allowances you are claiming, you must give your employer a new Form W–4 within 10 days after either of the following.

• Your divorce, if you have been claiming married status.
• Any event that decreases the number of withholding allowances you can claim.
• Generally, you can submit a new Form W–4 whenever you wish to change the number of your withholding allowances for any other reason.
• Changing your withholding for the current year: If events in the prior year will decrease the number of your withholding allowances for this year, you must give your employer a new Form W–4 by December 1 of the prior year. If the event occurs in December of the prior year, submit a new Form W–4 within 10 days.

Completing Form W–4 and Worksheets

Form W–4 has worksheets to help you figure how many withholding allowances you can claim. The worksheets are for your own records. Do not give them to your employer.

Two Jobs

If you have income from two jobs at the same time, complete only one set of Form W–4 worksheets. Then split your allowances between the Forms W–4 for each job. You cannot claim the same allowances with more than one employer at the same time. You can claim all your allowances with one employer and none with the other, or divide them any other way.

Married Individuals

If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using your combined income, adjustments, deductions, exemptions, and credits. Use only one set of worksheets. You can divide your total allowances any way, but you cannot claim an allowance that your spouse also claims.

If you and your spouse expect to file separate returns, figure your allowances using separate worksheets based on your own individual income, adjustments, deductions.

Getting the Right Amount of Tax Withheld

In most situations, the tax withheld from your pay will be close to the tax you figure on your return if you follow these two rules.

• You accurately complete all the Form W–4 worksheets that apply to you.
• You give your employer a new Form W–4 when changes occur.

But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations.

• You are married and both you and your spouse work.
• You have more than one job at a time.
• You have non-wage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income.
• You will owe additional amounts with your return, such as self-employment tax.
• Your withholding is based on obsolete Form W–4 information for a substantial part of the year.

To make sure you are getting the right amount of tax withheld, get Publication 919, How Do I Adjust My Tax Withholding? It will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It also will help you determine how much additional withholding, if any, is needed each payday to avoid owing tax when you file your return.

Rules Your Employer Must Follow

It may be helpful for you to know some of the withholding rules your employer must follow. These rules can affect how to fill out your Form W–4 and how to handle problems that may arise.

New Form W–4. When you start a new job, your employer should give you an IRS Form W–4 to fill out. Your employer will use the information you give on the form to figure your withholding beginning with your first payday.

If you later fill out a new Form W–4, your employer can put it into effect as soon as possible. The deadline for putting it into effect is the start of the first payroll period ending 30 or more days after you turn it in.

No Form W–4. If you do not give your employer a completed Form W–4, your employer must withhold at the highest rate—as if you were single and claimed no allowances.

Repaying Withheld Tax.   If you find you are having too much tax withheld because you did not claim all the withholding allowances to which you are entitled, you should give your employer a new Form W–4. Your employer cannot repay any of the tax previously withheld.

However, if your employer has withheld more than the correct amount of tax for the Form W–4 you have in effect, you do not have to fill out a new Form W–4 to have your withholding lowered to the correct amount. Your employer can repay the amount that was incorrectly withheld. If you are not repaid, your Form W–2 will reflect the full amount actually withheld.

If you claim exemption from withholding, your employer will not withhold federal income tax from your wages. The exemption applies only to income tax, not to Social Security or Medicare tax.

You can claim exemption from withholding for the current year only if both the following situations apply.

• For the prior year, you had a right to a refund of all federal income tax withheld because you had no tax liability.
• For the current year, you expect a refund of all federal income tax withheld because you expect to have no tax liability.

Student.   If you are a student, you are not automatically exempt.  If you work only part time or only during the summer, you may qualify for exemption from withholding.

For help with your withholding, you may use the Withholding Calculator.  This easy-to-use calculator can help you figure your federal income tax withholding so your employer can withhold the correct amount from your pay. This is particularly helpful if you’ve had too much or too little withheld in the past, your situation has changed, or you are starting a new job.

The Advanced Earned Income Tax Credit has been eliminated effective Dec. 31, 2010. Taxpayers who are eligible for the EITC may claim it when they file their tax returns.

Net Investment Income Tax

A new Net Investment Income Tax goes into effect starting in 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. For additional information on the Net Investment Income Tax, see our questions and answers.

Additional Medicare Tax 

A new Additional Medicare Tax goes into effect starting in 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the individual’s filing status. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately, and $200,000 for all other taxpayers. An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year.  For additional information on the Additional Medicare Tax, see our questions and answers.

Source: Internal Revenue Service
Last reviewed: October 3, 2012