What Are Withholding Allowances?

Last updated April 23, 2022

Every new employee needs to fill out a W-4 Employee’s Withholding Certificate, which provides information on how much of an employee’s pay an employer should withhold for tax purposes. Each state has a tax withholding form that employers must use to determine an employee’s tax deductions by their withholding tax allowances. Both employers and employees need to understand what withholding allowances are and how they work.

What are Withholding Allowances?

A withholding allowance is an exemption that reduces the amount of income tax taken from an employee’s paycheck. Employees claim withholding allowances on their W-4 forms when they first start a new job. The employer then uses the W-4 information to calculate the amount from an employee’s pay withheld for tax purposes. There is a direct correlation between the number of exemptions claimed and the amount of income withheld: the more tax exemptions, the less income tax is withheld from each paycheck. The fewer exemptions an employee claims, the more tax is withheld.

Who Can Have Withholding Allowances

Employees must have tax withholding if all of the following apply:

Their annual income is more than $1,050
Another person can claim them as a dependent
They have more than $350 on unearned income.

A single person who isn’t a dependent can earn $12,400 in gross income before taxes are due.

Employees can claim as many withholding allowances as applicable to their filing status. Whether single or married, filing jointly with their spouse or separately, all play a factor in how much an employee may claim as withholding allowances.

Factors that affect an employee’s withholding allowances include:

Marriage status (married, single)
If married, the employment status of their spouse
The number of jobs they may have
If the wages from a second job are below $1,500
If they have children or dependents
If they file as head of household

If an employee does not file a W-4, the employer must withhold tax at the highest rate–as if the employee were single with no allowances.

Calculating Withholding Allowances

The amount of federal income tax withheld varies from employee to employee. The IRS provides a formula for how many allowances an employee should claim to have the right about withheld from each paycheck. Furthermore, tables are provided for employers to calculate how much federal income tax to deduct from employee’s wages.

As an employer, how much you withhold from each employee depends on the employee’s income and how many withholding allowances they claimed. Once you have that information, you will use payroll frequency, the employee’s incoming, and their claimed withholding allowance to calculate the amount of federal income tax to withhold.

Changing Withholding Allowances

An employee may change their withholding allowances at any time, usually due to a change in life circumstances, such as marriage, divorce, or having a child. To apply the changes, employees have to fill out a new W-4 form.

Withholding Allowances Facts

In 2020, the IRS administered an updated form eliminating withholding allowances as a means of simplifying the process. However, that does not mean that it is not important to continue to consider withholding allowances–many states still use them to determine state income tax withholding.
With children and dependents, the number of allowances that an employee can claim becomes more complicated.
The IRS provides a Withholding Calculator to simplify the process of calculating withholding allowances, which may be of use to employees as well as employers.
The number of withholding allowances a parent claim depends on the number of eligible children they have and their income.
If you’re an employee, the IRS may ask your employer for your W-4 to verify the number of exemptions you claim, and under certain circumstances, you may be asked to justify your claim.
As an employee, you will want to make sure that the right amount is being withheld to avoid any surprises during tax season. A large unexpected tax bill may present financial trouble for some, but a large tax refund also indicates that you may be living on less money than necessary through the year by giving the government an interest-free loan. You may want to check your withholdings at least once a year.

Understanding Withholding Allowances

Withholding allowances can be confusing for some taxpayers to understand, but employees need to claim an accurate amount of payroll withholding allowances for their employer to deduct the right amount from their pay. The amount of federal income tax an employer withholds varies by an employee, so it is important that employers accurately calculate an employee’s deductions based on their claimed withholding allowances.

FormPros offers a user-friendly W-4 generator to help employers easily produce and print W-4 forms for their employees to fill out, saving all parties involved time and money. FormPros also makes creating pay stubs easy, helping to make the entire payroll process much simpler.