# Withholding Allowance: What Is It, and How Does It Work?

## What Is a Withholding Allowance?

A withholding allowance is an exemption that reduces how much income an employer deducts from an employee’s paycheck for taxes and transmits to the Internal Revenue Service (IRS) on their behalf.

This exemption from withholding is tied to the personal exemption, a federal tax break that was available to all taxpayers, regardless of their expenses, through 2017.

The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated [personal exemptions](https://www.investopedia.com/terms/p/personal-exemption.asp) for the period from 2018 to 2025. As a result, the withholding allowance has no current practical relevance. But that could change after 2025, if the TCJA changes are not extended.

For now, it is no longer part of [Form W-4: Employee’s Withholding Certificate](https://www.investopedia.com/articles/personal-finance/081214/purpose-irs-w4-form.asp), which the IRS completely redesigned.

Employees in the United States fill out and submit Form W-4 to their employers so that their employers know how much to withhold from workers' paychecks.  

### Key Takeaways

*   A withholding allowance is an [exemption](https://www.investopedia.com/terms/e/exemption.asp) from withholding that reduces the amount of income an employer deducts from an employee’s paycheck for income taxes.
*   The [Tax Cuts and Jobs Act (TCJA)](https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/) of 2017 eliminated personal exemptions and put an end to the withholding allowance.
*   Before 2018, withholding was based on the number of allowances a taxpayer claimed for themselves, their spouse, and their dependents, as well as their tax filing status.
*   The TCJA dramatically increased the standard deduction amount and the Child Tax Credit, which could offset at least part of the change related to eliminating personal exemptions.
*   [IRS](https://www.investopedia.com/terms/i/irs.asp) Form W-4 is used to calculate withholding. Individuals should file a new Form W-4 whenever their personal or financial situation changes.

![Withholding Allowance](https://www.investopedia.com/thmb/ir5kVr8f_oN8F5r2yFCS072xrms=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/WitholdingAllowance_INV-93a2e67b5dd84226a71523911b15bd2f.jpg)

*— Investopedia / Nez Riaz*

## How the Withholding Allowance Worked

Before 2018, an individual was required to [fill out Form W-4](https://www.investopedia.com/articles/personal-finance/081214/filling-out-your-w4-form.asp) when hired by an employer. The form required certain personal information, such as their name, [Social Security number](https://www.investopedia.com/terms/s/ssn.asp), and the number of allowances to be claimed.

The employer used the W-4 to determine how much income to subtract from an employee’s [paycheck](https://www.investopedia.com/terms/p/payroll.asp) and remit to the tax authorities.

The total number of allowances claimed was important—the more tax allowances claimed, the less income would be withheld from a paycheck; the fewer allowances claimed, the more income would be withheld.

The withholding amount was based on filing status—single or married but filing separately, married and filing jointly, or head of household—and the number of withholding allowances claimed on the [W-4](https://www.investopedia.com/terms/w/w4form.asp). 

It was important to claim the right number of allowances to avoid paying too little in taxes or to keep from giving the government an interest-free loan by paying too much in taxes (only to receive the amount back later as a refund).

## Determining Withholding Post-2017

Much of how things worked before the passage of the TCJA is the same today. Individuals still fill out a W-4 which employers still use it to calculate how much income from an employee's paycheck to withhold. Tax filing status is still key.

But the IRS simplified Form W-4 and how taxpayers should determine their withholding. Now, withholding amounts relate to whether an individual has multiple jobs or a spouse who works, what credits they can claim, and other adjustments.

For example, withholding is affected if:

*   A taxpayer can claim the [Child Tax Credit](https://www.investopedia.com/terms/c/childtaxcredit.asp) for a qualifying child (or a dependent who is not a qualifying child)
*   They itemize personal deductions instead of claiming the [standard deduction](https://www.investopedia.com/terms/s/standarddeduction.asp)
*   They have additional income from dividends, interest, or retirement income
*   They (or their spouse) have more than one job  
    

> **Tip**
>
> Fortunately, you can use the IRS Withholding Calculator to see whether you're having the right amount withheld from your paycheck.

## Complete Exemption From Withholding

An individual can be completely exempt from withholding, but it’s not easy to receive that status.

You can claim the exemption from withholding only if you had a right to a refund of all federal income tax withheld in the prior year because you didn’t have any [tax liability](https://www.investopedia.com/terms/t/taxliability.asp) and you expect the same for the current year. You simply write “Exempt” on Form W-4.

This must be done annually; the exemption doesn’t automatically carry over. 

## When To Redetermine Withholding

A new Form W-4 must be filed with a taxpayer’s employer whenever the taxpayer's personal or financial situation changes (e.g., they get married, have a baby, or their spouse enters or leaves the workplace).

The new withholding goes into effect no later than the first payroll period ending 30 days after giving the revised form to the employer. The employer may implement it sooner but isn’t required to do so.  

It’s also possible to request that an additional amount or a specific dollar amount be withheld in addition to other tax withholdings.

This may be helpful for taxpayers receiving a year-end [bonus](https://www.investopedia.com/terms/b/bonus.asp) or for those who simply want to boost withholding near the end of the year (perhaps to cover taxes on [investment income](https://www.investopedia.com/terms/i/investmentincome.asp), such as [capital gain](https://www.investopedia.com/terms/c/capitalgain.asp) distributions received at year-end).

> **Important**
>
> Be sure to file a new Form W-4 if your personal or financial situation changes. If you don't, you could end up having too little money withheld throughout the year, which would affect what you must pay come tax time. The IRS could also assess a financial penalty.

## What If Too Little Is Withheld?

The short answer: You are likely to owe money when you file your [tax return](https://www.investopedia.com/terms/t/taxreturn.asp). And if you have significantly [underpaid your taxes](https://www.investopedia.com/terms/e/estimated-tax.asp) during the year, you may have to pay a penalty.

If you do not have enough withheld from your paycheck, you can request that your employer withhold an additional dollar sum.

If, on the other hand, you have more income withheld than you'll owe in taxes, you'll receive a [refund](https://www.investopedia.com/terms/t/tax-refund.asp) after you file your annual income tax return.

Receiving a refund isn’t necessarily a good thing. It represents money you went without during the year and that could have been invested for your future financial well-being or gone toward bills.

## How Much Should I Have Withheld From My Paycheck?

Many people think it’s better to have less money withheld from their paychecks to pay taxes. Alternatively, others prefer to play it safe and overpay, mindful that they will get a refund later on down the line. Neither of these approaches is smart. The best option is to fill out Form W-4 as accurately as possible. Doing so will ensure that you don’t get hit with a nasty tax bill out of the blue or essentially give the IRS an interest-free loan.

## How Is Withholding Determined?

The withholding amount generally depends on a taxpayer's filing status, number of jobs, other income, and whether they have dependents.

## How Do Employers Calculate How Much To Withhold From Employee Pay?

After an employee fills out Form W-4, it is up to the employer to calculate how much to withhold from each paycheck for federal income taxes. Payroll software should have a built-in calculator to work all this out. Alternatively, employers can consult IRS [Publication 15-T: Federal Income Tax Withholding Methods](https://www.irs.gov/pub/irs-pdf/p15t.pdf).

## The Bottom Line

The withholding allowance reduced how much money an employer withheld from employee paychecks for income taxes. Eliminated by an act of Congress in 2017, it could be reinstated if Congress fails to extend the TCJA tax cuts.

Nonetheless, it's important to ensure that your employer withholds the right amount of money from each paycheck to pay federal income taxes.

If you don't fill out Form W-4 carefully, you can get hit with a nasty tax bill out of the blue or essentially end up lending the IRS money free of charge.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Tax Reform Provisions That Affect Individuals](https://www.irs.gov/newsroom/individuals)." Click "Personal Exemption Deduction Eliminated."
>     
> 2.  Intuit TurboTax. "[The W-4 Form Changed in Major Ways — Here’s What’s Different](https://turbotax.intuit.com/tax-tips/irs-tax-forms/the-w-4-form-changed-in-major-ways-heres-whats-different/L611CpnaP)."
>     
> 3.  Intuit TurboTax. "[Withholding Allowances: Are They Still Used on IRS Form W-4?](https://turbotax.intuit.com/tax-tips/tax-refund/withholding-allowances-are-they-still-used-on-irs-form-w-4/c0Kvu5p1c)"
>     
> 4.  Internal Revenue Service. “[Tax Withholding Estimator](https://www.irs.gov/individuals/tax-withholding-estimator).”
>     
> 5.  Internal Revenue Service. "[Individuals: Tax Reform Provisions That Affect Individuals](https://www.irs.gov/newsroom/individuals)."
>     
> 6.  Internal Revenue Service. “[Form W-4: Employee’s Withholding Certificate](https://www.irs.gov/pub/irs-pdf/fw4.pdf)." Page 2.
>     
> 7.  Internal Revenue Service. “[Topic No. 753, Form W-4, Employees Withholding Certificate](https://www.irs.gov/taxtopics/tc753).”
>     
> 8.  Internal Revenue Service. "[Underpayment of Estimated Tax by Individuals Penalty](https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty)."
>     
> 9.  Internal Revenue Service. "[Pay As You Go, so You Won’t Owe: A Guide to Withholding, Estimated Taxes and Ways To Avoid the Estimated Tax Penalty](https://www.irs.gov/payments/pay-as-you-go-so-you-wont-owe-a-guide-to-withholding-estimated-taxes-and-ways-to-avoid-the-estimated-tax-penalty)."