What is withholding tax, and do I check or change it?

Yahoo

04-02-2025

When you get your paycheck every other week, you'll notice the amount you earned during the pay period isn't the same amount you take home. That's because your employer withholds some money from each paycheck in the form of withholding taxes, which help pay your income tax bill throughout the year.
It's important to understand how income tax withholding works, how it affects your tax bill (or refund) at the end of the year, and how to check or change your tax withholding to make sure you're having the right amount taken out for your situation.
A withholding tax is the money your employer deducts from your paychecks each month to pay income taxes on your behalf. The amount of taxes your employer will withhold depends on your earnings and the information you provide on the IRS Form W-4.
The federal government operates on a pay-as-you-earn tax system. In other words, you're required to pay taxes on your income as you earn it. Tax withholding ensures the government will have regular tax revenue throughout the year. And for your part, it helps you avoid a hefty tax bill when you file your income tax return the following spring.
Withholding taxes are required for most income, including regular pay, commissions, pensions, bonuses, reimbursements, gambling winnings, and other income. If you aren't subject to tax withholding — if you're self-employed, for example — you're still required to pay taxes by certain due dates throughout the year in the form of estimated tax payments.
Your employer calculates your tax withholding based on your annual earnings and the information you provide on your W-4 form. On the W-4, you provide information such as:
Your filing status
The number of dependents
Other income, including interest, dividends, and retirement income that doesn't have taxes automatically withheld
Deductions you're eligible for other than the standard deduction
Extra withholding taxes you want withheld each pay period
Once you complete your W-4, your employer uses withholding tables provided by the IRS, along with other adjustments on your W-4, to help calculate the correct withholding amount. The amount you'll pay depends on the income tax rate that applies to your earnings.
If you live in a state that has income taxes, you'll also likely have money withheld for your state income taxes. Because each state has its own tax code, the system for calculating tax withholdings and the way you can check or change your withholding will vary from state to state.
Read more: Federal income tax brackets and rates for 2024-2025
The simplest way to check your tax withholding is by using the IRS Tax Withholding Estimator. You'll provide information about yourself, your income and withholding, your income adjustments, and your tax credits and deductions.
Based on the information you provide, the IRS calculator will determine your anticipated tax obligation. It will also project a tax refund or underpayment amount based on your expected tax withholding. While it's not guaranteed to be accurate, you can expect it to be close to your actual situation as long as you provide comprehensive and accurate information.
The IRS recommends checking your tax withholding occasionally to ensure you're on track to pay the correct amount of taxes throughout the year. For example, you could check once per year plus any time there are changes in tax laws that could affect your tax liability.
The IRS also recommends checking your tax withholding when there are changes to your finances or tax situation, including:
Lifestyle changes such as marriage, divorce, a new child, a home purchase, retirement, or bankruptcy
A significant change to your earned income (a new job, a significant pay increase, leaving the workforce, etc).
Income that's not subject to withholding, including interest, dividends, capital gains, self-employment income, and distributions from retirement accounts
Eligibility for certain itemized deductions, including major medical expenses, interest expenses, charitable gifts, dependent care, education costs, etc.
Read more: How to choose the right federal tax filing status
When you start a new job, you'll have to complete a W-4 form to set your tax withholding for the year. Even if you've already completed one, you may decide to change your withholding based on life changes or discrepancies when you check your withholding. If you need to change your federal tax withholding, you can simply submit a new W-4 to your employer.
It's important to be as accurate as possible when completing the form to ensure you're having enough tax withheld without overpaying significantly.
When you're completing your W-4, the provided Multiple Jobs Worksheet and Deductions Worksheet can be helpful in reporting other factors that may increase or decrease your tax liability. And remember that if you're concerned about underpaying, you can always use the 'extra withholding' option to have a bit extra withheld from each paycheck.
You may be exempt from tax withholding if you had no federal income tax liability last year and don't expect to have any tax liability in the current tax year. If that's the case for you, simply write 'Exempt' on the W-4 form you complete for your employer.
Keep in mind that just because you believe you're exempt from tax withholding doesn't necessarily mean you won't be on the hook for a tax bill. If you do have enough income, you'll end up owing a tax bill to the IRS and could also be responsible for penalties.
Your withholding taxes don't generally represent the total amount of income taxes you'll owe for the year. When you file your tax return the following March or April, you'll use your total income, deductions, credits, and other factors to determine how much you owe in income taxes.
If the amount of withholding tax you've paid exceeds the amount of tax liability you owe, you'll get a refund from the federal government. On the other hand, if you haven't paid enough withholding taxes, you'll end up with tax due.
Some people prefer getting a refund at the end of the year, but either a large refund or a large tax bill could be a sign you need to change your tax withholding. For many taxpayers, the ideal scenario is to pay withholding taxes as closely as possible to their actual tax liability.