What is Withholding Tax?
Withholding taxes are a form of income taxes. These taxes are taken out, or withheld, from an employee’s paycheck, which the employer pays directly to the government.
The IRS determines how much to withhold from your paycheck using the W-4 form you fill out when you’re hired. The number of deductions you take determines how much the IRS withholds. The W-4 form will ask the following questions to see how much should be withheld.
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.
The amount of taxes withheld determines if you get a tax refund each year. If you withhold more than you need to, you’ll get a refund. If you don’t withhold enough, you’ll owe more income taxes.
After you do your taxes, if you realize that you haven’t had enough taxes withheld, or have a life changing event that changes your deductions, then you can fill out another W-4 claiming fewer deductions. This will help so that you don’t have to pay more taxes during tax season.
It doesn’t really matter if you have the correct amount withheld from your paycheck. If you prefer to get a refund then you’ll want to take fewer deductions. However, if you don’t mind paying taxes later, then you can take fewer deductions and have more take-home pay.
The IRS also withholds taxes on other income such as pensions, bonuses, commissions, and gambling winnings.
Withholding Tax Scenario
Jack Taylor is employed and filled out a W-4 when he first started at his job. However, his wife recently had a baby and quit her job. So he needs to readdress his withheld tax deductions.
In order to do this, Jack asked his employer for a new W-4 form (it can also be found online and then submitted to your employer). Jack will follow the personal allowances worksheet on the W-4 to find out his new deductions.
According to the Personal Allowances Worksheet on the W-4 Form Jack is eligible for 6 deductions. However, if Jack takes all of those deductions he may not have enough taxes withheld. Instead of taking all those deductions Jack chose to only take 2 deductions in the hope that he wold get a tax refund. After he does his taxes for the year he can reassess if he needs to take more deductions.