Ever wonder why you have money taken out of your paycheck every week and you’re still having to send a big check to Uncle Sam in mid-April? The answer is withholding. It’s a simple concept, but like everything else to do with the U.S. tax code, it can be complicated. Read on to learn more about withholding, including the types of withholding and how you can best estimate your withholding tax for the year.
What are withholding taxes?
Simply put, a withholding tax is the amount of money that goes immediately from your paycheck into Uncle Sam’s pocket. Employers are required to set aside money from your paycheck for federal income taxes (also for Medicare and Social Security, but those are separate taxes). You still have some say over how much gets deducted, though.
Withholding is far from an exact science. Ask your employer to withhold too much, and you’re making an interest-free loan to the federal government. Ask your employer to withhold too little, and you’re potentially looking at a big tax bill.
How to calculate
How to calculate withholding taxes
Most of us notice several deductions on our paychecks. If you’re a full-time employee (as opposed to a contract worker), you’re likely to see the following deductions:
- Federal income tax withheld
- State income tax withheld (ranging from 1% to 13.3% in 43 states)
- Medicare (1.45% of the total from your paycheck, and 1.45% paid by your employer)
- Social Security (6.2% from your paycheck and another 6.2% from your employer, on the first $176,100 of income)
As a general rule, it’s best to review your previous tax year filing and determine your effective tax rate, or the percentage of your income that you paid in taxes. As long as you haven’t had any major life changes, such as a better-paying new job, new child, marriage, or divorce, you can apply the percentage to your anticipated earnings and divide it by the number of pay periods.
Although your employer is responsible for withholding money for federal taxes, you have the ability to influence the amount by using a W-4 form, which is usually near the top of the stack of paperwork when you start a new job.
Unlike most things to do with taxes, the W-4 is relatively straightforward. You’ll need:
- Personal information, such as name, address, Social Security number, and filing status.
- Number of jobs held by you (also your spouse, if you’re filing jointly). You can use a worksheet included with the W-4 to calculate additional withholding.
- Number of dependents if your income is less than $200,000 (or $400,000 if married, filing jointly).
- Any other adjustments, including other income, possible deductions, or additional withholding you’d like. Again, there’s a worksheet with the W-4 for additional withholding.
If you really want to figure out withholding for the next year, we’d recommend using the IRS Tax Withholding Estimator tool. You’ll need to know:
- Filing status
- Taxes withheld to date
- Any planned adjustments, such as student loan interest or individual retirement account (IRA) contributions
- Whether you’ll take a standard deduction or itemize, and the amounts of those deductions.
- Any tax credits you’re eligible for, such as mortgage interest, child care, or property taxes.
The IRS tool will tell you how much you’ll need to withhold to get a refund or how much in taxes you’re likely to owe.
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How to change
Changing your withholding taxes
Figuring out taxes -- and withholding -- used to be much easier for Americans who could count on remaining in the same job for much of their working lives. But the typical worker now changes jobs every two years and nine months, according to one estimate. That adds up to a lot of W-4s over the years, and odds are good that you won’t always be earning the same amount of money.
You’ll also want to keep an eye on money earned from side hustles and adjust your W-4 to adapt to changing circumstances, such as a layoff, marriage, divorce, or childbirth. Filing income taxes can be one of the year’s most stressful events; proper withholding can alleviate a lot of that stress.
