Withholding: What is it, and how does it work

Withholding: What is it, and how does it work?

In 2020, the IRS completely revamped the W-4 , Employees Withholding Certificate, to be more in line with the current tax rules. Tax Cuts & Jobs Act. One of those changes was to remove the allowances section from Form W-4. (We will delve more into the W-4 below.) This helped make filling out that particular form more streamlined. 

What is withholding?

The U.S. has a pay-as-you-go tax system, mean you pay taxes as you earn. This is generally accomplished by withholding money from your paycheck to cover both federal and state tax obligations. State withholding is based on state level taxable income, while federal withholding is based on federal taxable income. State withholding rules vary by state (read more on that below), but the federal withholding rules are consistent everywhere throughout the U.S.

The IRS Form W-4, also known as the Employee's Withholding Certificate, is an important document you fill out when you begin a new job or if there are some major changes in your life. (More on that below.)

You use your W-4 to inform your employer about how much income to withhold from your paycheck to cover taxes.

One of the first things you do when starting a new job is complete an IRS, and sometimes state, Form W-4. By filling out the form, you provide your employer with information that helps them withhold the appropriate amount of federal income tax from your paycheck, so you don’t end up with a surprise tax bill. Form W-4 consists of several sections requiring you to provide information such as your name, address, Social Security number, filing status, and the number of dependents you have for the child tax credits you can claim.

Factors influencing withholding

Your employer will use information you provided on your Form W-4 to determine how much to withhold from your paycheck to cover your income taxes. The amount of your taxable income and how frequently you are paid also play a part in how much federal income tax withholding (FITW) and state income tax withholding (SITW) comes out of each paycheck.

Withholding will be different from person to person. The withholding tax choices you make on your W-4 depend on the number of your eligible children, your income from all sources and your spouse's income (if you are filing a joint return).

They vary based on the following:

• Whether you’re married or single
• Your filing status such as head of household or single
• All your jobs and how much you earn at each job
• If you file married filing jointly and your spouse doesn’t have a job
• If you have wages from a second job or your spouse has wages 
• If you have dependents and will be claiming one, or more, of the child tax credits
• There are other factors as well. Your withholdings affect your tax return and how much of a potential tax refund you may receive, or how much money you’ll have to pay the IRS when you file your return, so it’s important to reach out to a tax professional with any questions you may have.

Calculating withholding

When you complete Form W-4, there are 3 key areas that impact how much tax your company will withhold from your paycheck, which will then affect your tax return during tax time.

You’ll want to bear these factors in mind:

• Making sure you mark down all the jobs in your household. If you have more than one job, or you’re married, you’ll need to consider all your income—and if some jobs bring in more money than others. This can be complex, so you can work with a Tax Pro on what’s right for your specific situation.
• Claiming children and dependents. This will give a snapshot into the possible credits, like the Child Tax Credit, that you may be able to claim.
• Making any other adjustments. This could be for any side or gig income or additional income, like investments rental properties, that you have, or extra withholding or deductions that you want to make note of.
• There are other pieces to the withholding puzzle. It’s always best to have your withholding accurately reflect your family’s situation as closely as possible. If you end up withholding too much, you can end up with a larger tax refund. However, if you withhold too little, you can end up with a surprise tax bill and a possible underpayment penalty. Our Tax Pros can help you year-round with any questions you may have.

How do I fill out a W-4 form?

The W-4 form was updated due to tax reform and the elimination of personal and dependent exemptions.

If your tax situation is simple, you only need to enter your name, Social Security number, filing status, and signature in Step 5. Your withholding will be based on your standard deduction and tax rate with no additional adjustments. If your tax situation is more complex, you need to complete Steps 2-5.

First, you may need to complete the multiple jobs worksheet in Step 2 if it applies to you. In Step 3, enter the number of dependents if your annual income is expected to be less than $200,000 ($400,000 if married filing jointly). In Step 5, enter your expected deductions, other income aside from your job, and additional voluntary withholding.

Are there variations of W-4 Forms?

Yes. While only a Form W-4 can be given to employers, there are other forms in this series: W-4P for retirement income and W-4V for governmental payments like Social Security benefits and unemployment. Withholding is voluntary for these types of income, but recommended since they are subject to income tax.

Additionally, there is a state W-4 equivalent form you should not overlook if you live in a state with an income tax. For instance, New York residents must fill out an IT-2104, which has the same purpose as a Form W-4, except it's for state and city taxes. If you move to or leave the city but have stayed within the state, that could force you to change your state and local withholding, but your federal tax situation usually won’t change.

If you only want to change one type of withholding, like state taxes, you do not need to file a new federal Form W-4. The same is true of wanting to leave your state withholding as-is, you don't need to file a new state form and just need to submit a new federal Form W-4.

Where do I get a W-4 form?

You can download the Form W-4 for free from the official IRS website if your employer or payroll provider did not already give you on

When should you think about changing your withholding?

The IRS recommends thinking about reviewing and possibly changing your withholding:

• Early in the year.
• When the tax law changes.
• When you have major life changes, like:
  • Lifestyle: Marriage, divorce, birth or adoption of a child, home purchase, retirement, or filing chapter 11 bankruptcy.
  • Wage income: You or your spouse start or stop working or start or stop a second job.
  • Taxable income not subject to withholding: You receive interest income, dividends, capital gains, self-employment income, or IRA (including certain Roth IRA distributions).
  • Adjustments to income: You expect to take an IRA deductions, student loan interest deduction, or alimony deduction.
  • Itemized deductions or tax credits: You expect to have medical expenses, taxes, interest expenses, gifts to charity, dependent care expenses, education credit, Child Tax Credit, or earned income credit.
  • Every few years, even if you don’t feel much has changed.

There are other situations not included here. If you think you may not be withholding enough federal tax, it may be time to adjust your withholding using Form W-4.

Questions? We are here to help you navigate the complexities of federal and state tax withholdings. You can work with Jackson Hewitt Tax Pro to decide what the right next steps may be for your tax situation.

About the Author

Mark Steber is Senior Vice President and Chief Tax Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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