How to Determine Tax Withholding

Tax withholding can be estimated but the W-2 forms you receive at the end of the year are the final word.

Tax withholding is the practice of employers deducting income taxes from your paycheck and forwarding the money to the government as an advance payment on your estimated tax bill at the end of the year. The amount withheld from your paycheck depends on several factors such as how much you earn, your filing status and how many exemptions you claimed on your W-4 form. All employees must fill out a W-4 form and the number of exemptions you claim on this form determines how much money is withheld from each paycheck.

You should check the amount of tax being withheld from your paycheck to make sure it matches up with the number of exemptions you've claimed. If your employer is withholding too much, you are essentially lending money to the government interest-free. If your employer withholds too little, you may owe penalties for underpayment when you file your taxes. When calculating your withholding, the standard deduction is already factored into the IRS withholding tables.

Step 1

Determine how much you earn each pay period.

Step 2

Determine how many pay periods you will have during the year. For example, if you are paid biweekly, you will have 26 pay periods; if you are paid monthly, you will have 12.

Step 3

Multiple the number of exemptions on your W-4 form by $3,650. When calculating tax withholding for both the 2009 and 2010 tax years, each exemption you claim reduces your annual income subject to tax withholding (taxable income) by $3,650. Thus, if you claimed two exemptions on your W-4, your taxable income would be reduced by $7,300.

Step 4

Divide the total amount of your exemptions (from Step 3) by the number of pay periods per year (from Step 2). Subtract that amount from your gross earnings each pay period (from Step 1). The result is your taxable income.

Step 5

Calculate how much tax should be withheld from each paycheck using the federal withholding tables to ascertain how much tax you'll actually owe in each pay period. For example, if you are single, you are paid biweekly and your income after exemptions is $893, you should have $132.50 withheld. Compare this amount with the federal income tax your employer is withholding to make sure that the appropriate amount is being withheld.

Tip

Include all taxable fringe benefits in your earnings. If you are unsure of whether a certain benefit is taxable, ask your employer.

Warning

The amounts mentioned in this process apply to federal tax withholding. Many states withhold income tax using similar methods, but the amounts are different and typically less than the federal taxes withheld from your paycheck.

Things You'll Need

  • W-4 form

  • Calculator

  • Tax withholding tables

resources