Withholding Allowance

Withholding allowance was a designation used on W-4 forms to indicate the amount of federal income tax that employers should withhold from employees’ paychecks each pay period.

How could an employee calculate the number of withholding allowances on a W-4 form?

Withholding allowances used to help employees estimate tax withholding based on their filing status, credits, and income. However, after the 2017 tax reform suspended personal and dependent exemptions, the IRS redesigned the W-4 form and eliminated withholding allowances in 2020to improve the accuracy of withholding.

What happens if an employee claims too many or too few withholding allowances?

Although withholding allowances are no longer used, the same basic concept still applies. If an employee doesn’t provide enough information on their W-4, such as additional income or dependents, too little tax may be withheld, potentially resulting in a tax bill later. On the other hand, providing more information than necessary can lead to more tax being withheld, which might result in a larger refund at tax time. The updated W-4 form is designed to help strike the right balance by collecting more detailed information instead of relying on allowances.

Can employees change their withholding allowances during the year?

Yes, although withholding allowances are no longer used, employees can update their income, dependents, deductions, and other information on the current W-4 form at any time during the year to adjust the amount of tax withheld from each paycheck.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.