What is – A Federal Withholding Allowance?

A Federal withholding allowance is the governments way of allowing you to adjust your taxable income, the basis for the federal tax withholding seen on your paycheck. Allowances are claimed on IRS Form W4, (it is one of the forms you must fill out when starting a new job). Some examples of federal allowances are:

  • Dependents you claim on your tax return (ie children)
  • If no one else can claim you as a dependent on their tax return
  • If you plan to file as head of household on your tax return

In the tax year 2011 each federal allowance claimed reduces your taxable income by $3,700.

Example:

Mark is a single male with no children and has a gross income of $50,000/year; he has no pre-tax deductions, making his taxable income also $50,000/year. A few months later Mark gets a new job and needs to fill out his W4, he realizes he was claiming no allowances before, (being just out of college when he filled out his first W4 he didn’t quite know what he was doing) and adjusts to claim 1 (no one else can claim him as a dependent on their tax return). This lowers Mark’s taxable income by $3,700 to $46,300, which also reduces his monthly federal tax withholding, boosting his monthly net income or take home pay.

An important note

You can claim as many allowances as you want on your W4, but this does not change the amount of federal tax owed in a given year. Claiming an allowance only lowers federal income tax withholding, come tax return time if you claimed ten allowances but only two actually apply (the government will check, so will any tax prep software) you will be stuck with a big fat tax bill, owing big Sam all that money which wasn’t withheld from your paycheck. On the contrary, if you receive a large refund you may want to consider increasing the number of allowances claimed, instead of waiting an entire year for that money you will receive a small piece of it every month because of reduced tax withholding.    

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Your Paycheck – Federal Income Tax Withholding

Why this topic should interest you?

This is your money and the government takes a piece before it even hits your pocket! Just because we must pay taxes by law doesn’t mean we should ignore them all together and hope for a refund when we file each year. Understanding the basic principles of federal tax withholding can prevent you from owing money to the government during tax season and could even boost your monthly net income.

Federal income tax withholding is the portion of income the federal government withholds from your paycheck. It is based upon taxable income, which is usually gross income adjusted for any tax deductions, like contributing to a retirement plan. There are three types of federal taxes withheld, the main federal withholding, social security, and medicare. All of them may or may not show up on your paycheck, depending on your status such as student, senior citizen etc.

Federal Withholding – This is the big boy, the main tax used to fund the federal government. It is based upon your taxable income and your filing status, single, married, etc. It is also a graduated scale, meaning the more you make the more you pay. Below is the 2011 IRS Tax Withholding Table.

Here is an example of how to use the table. Say you are a bachelor two years out of college with a gross income of $52,000/year and a taxable income of $47,000/year. Over the course of 2011 you should expect big Sam to withhold $7,350 in federal income tax. How did I arrive to this value? Remember, because of the graduated scale you can’t use just one tax rate, for our bachelor with a taxable income of $47,000/year we actually have to use the 1st three brackets of the first column (single filers) to calculate his total withholding. The first $2,100 of income is not taxed, the next $8,500 is taxed at 10%, the subsequent $26,000 at 15%, and the remaining $10,400 at 25%, this is done until the point where the next bracket can not be reached. The calculation for our example is shown below:

Federal MED/EE – This is Medicare tax, the current rate for 2011 is 1.45% of gross income, which your employer matches. With our above example our bachelor would have $754.00 ($52,000 x 1.45%) withheld and his employer would pay an additional $754.00. This is the same for everyone regardless of marital status.

Federal OASDI/EE – This is Social Security tax, the current individual rate is 4.2% of gross income, and your employer must pay an additional 6.2%. Using the example above the bachelor would have $2,184.00 ($52,000 x 4.2%) withheld and his employer would pay an additional $3,224. This is the same for everyone regardless of marital status.

A quick recap for our bachelor:

Over the course of 2011 a total of $10,288.00 will be withheld from his paycheck for federal taxes alone, that’s no small amount!

Some important notes:

Tax law can change frequently, the percentages shown here are for 2011 only, however the logic behind the calculations tends to remain consistent, a quick Google search should provide the latest tax rates.

Many other factors can influence the total amount of taxes withheld in a given year, such as any federal allowances and other types of deductions, etc. These items can reduce your taxable income and lower your withholding.

Taxes withheld from your paycheck do not necessarily equate with taxes paid. If you usually get a refund this is because more tax was withheld during the year than what you owed and vice versa, if you owed money not enough tax was withheld. You can change the amount withheld from your paycheck by modifying the number of allowances claimed on IRS form W4. To amend this form, contact your employer. For more information please see post on Federal Allowances.

I am not a tax accountant; this post is only meant to be a quick informative overview of federal income taxes covering the basics. For detailed questions or concerns please consult a tax professional.

For more information on federal income tax please reference

Link to a simple payroll withholding calculator