# Withholding: Definition, Tax Rules, Federal vs. State

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*— Chalirmpoj Pimpisarn / Getty Images*

## What Is Withholding?

Withholding is the portion of an employee's income deducted and remitted by the employer directly to tax authorities. Withholding taxes are paid federally and may also be remitted to state and local tax authorities. The amount withheld depends on several factors like the employee's income and marital status, which are reported on [Form W-4](https://www.investopedia.com/articles/personal-finance/081214/purpose-irs-w4-form.asp). Federal income, Social Security, and Medicare taxes are among those withheld from employee paychecks. Taxpayers owe money if their withholding amount isn't enough.

### Key Takeaways

*   Withholding refers to the portion of an employee's income that is deducted and remitted by the employer to tax authorities.
*   Form W-4 requires information like marital status and number of dependents so employers can determine the amount to withhold.
*   Income, Social Security, and Medicare taxes are automatically withheld from employees' wages.
*   Employees owe money at the end of the year if employers do not withhold enough tax.  
    
*   State withholding rates vary, and nine states have no income tax.
*   Seventeen states allow local governments to levy income tax on their residents.

## Understanding Withholding

Anyone who earns income in the United States is obligated to pay [income tax](https://www.investopedia.com/terms/i/incometax.asp) to the federal government. These taxes include the federal income tax portion as well as Social Security and Medicare taxes. Most states and some counties and cities also have income taxes that taxpayers must remit.

Employers are required to [withhold tax](https://www.investopedia.com/terms/w/withholdingtax.asp) from employees' paychecks to ensure they consistently pay their income taxes. Employers deduct taxes and remit them to the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) on behalf of the wage earners.

### Form W-4

An employee who starts a new job must fill out IRS [Form W-4](https://www.irs.gov/forms-pubs/about-form-w-4), which the employer typically provides. The employee must indicate:

*   Whether they have one or multiple jobs. If they have multiple jobs, they must disclose how much is earned from the other job(s).
*   Their marital status. If [married](https://www.investopedia.com/ask/answers/061515/what-difference-between-single-and-married-withholding-tax.asp), they are asked whether the spouse is employed and how much the spouse earns.
*   The number of dependents.
*   Their filing status.

The remaining section of the form is filled out by the employer. The employer uses the information provided by the employee to calculate the amount of tax to withhold from the employee’s pay.

Any new event that unfolds in the employee’s life, such as a change in marital status, an additional dependent, or a new job, would require the employee to fill out a new W-4. The employer uses the new information to re-evaluate the portion of income to withhold for tax purposes.

## Special Considerations

If the tax withheld is inaccurate, the taxpayer has to pay more or less when tax filing season arrives. If the employee paid too much, the IRS will refund the excess. Workers who end up [not paying enough tax](https://www.investopedia.com/avoid-a-2018-tax-penalty-4582634) on earned income may be subject to late-payment penalties and interest.

Self-employed workers aren't subject to withholding but must pay their income taxes, usually as quarterly estimated tax payments. Taxpayers may also have to make estimated tax payments if they receive substantial income from dividends, [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp), interest, and/or [royalties](https://www.investopedia.com/terms/r/royalty.asp).

> **Fast Fact**
>
> The information provided on Form W-4 determines how much will be withheld from the employee's paycheck for taxes.

## Federal Withholding vs. State Withholding

Withholding is generally classified as [federal withholding or state withholding](https://www.investopedia.com/ask/answers/051515/what-difference-between-federal-and-state-withholding-tax.asp). Federal withholding is the amount withheld from wages for taxes owed to the federal government. The amount of withholding is based on [filing status](https://www.investopedia.com/terms/f/filingstatus.asp), the number of dependents, certain adjustments to income, and other personal withholding preferences selected on Form W-4.

Wage-earners can also elect to have a specific amount withheld in addition to what's calculated from elections. They can also elect to have nothing withheld by claiming an exemption.

Federal withholding includes amounts paid into the Social Security and Medicare funds. The employee and employer are responsible for paying an equal share of these taxes. The total withheld from the employee is 7.65%—6.2% for Social Security and 1.45% for Medicare. The employer pays a total of 7.65% on the employee's behalf for a combined total of 15.3%.

State withholding is the amount owed to the taxpayer's state of residence. In some cases, the taxpayer may owe taxes to multiple states. For instance, if a remote worker splits their time between two residences in different states, they may owe taxes to each state. It may be possible for an employer to withhold taxes for each state.

> **Important**
>
> Taxes withheld for Social Security and Medicare are referred to as FICA taxes. Employees and employers each contribute an equal portion (7.65% each). Self-employed individuals must pay the employee and employer portion, which is 15.3%.

## Other Types of Withholding

Withholding doesn't solely refer to taxation. It can also refer to other deductions made by the employer, such as those made for retirement accounts. Employees with employer-sponsored retirement accounts have their contributions withheld from their paychecks.

Employees who have traditional retirement accounts rather than Roth accounts do not pay income tax on their contributions. That is, they use pre-tax dollars and will owe income taxes on that money only when they withdraw it. This reduces their income for the year and the amount of tax that is withheld from their paychecks.

Employees with Roth accounts pay the income taxes on their contributions up front. That is, they pay taxes on their full income but pay a portion to the retirement account. They should owe no further taxes on that money when they withdraw it.

## What Does It Mean to Withhold Taxes?

To withhold taxes is to deduct a portion of an employee's wages for taxes and remit it immediately to the government. This is an estimate of the amount that the employee will owe for that period.

## How Much Withholding Should I Claim?

The amount you should withhold is based on your personal circumstances. It depends on your income, whether you have dependents, if you have additional sources of income, and more.

A single person with one job and no dependents would generally select a single filing status with one allowance. A married couple with dependents would usually select married filing jointly with several allowances.

## Should I Claim 0 or 1 on My Withholding?

Electing 0 as an allowance on the W-4 for tax withholding will result in the largest amount being withheld for your filing status. Claiming one allowance will reduce what is withheld for taxes but may still be sufficient for what is owed.

Claiming 0 is preferred by people who can be claimed as dependents by others and by people who have more than one source of income.

## Is It Better to Have Taxes Withheld From Unemployment?

The IRS recommends withholding taxes from unemployment wages to avoid owing the full amount due on the tax deadline.

## What Is the Withholding Compliance Program?

The Withholding Compliance Program, established by the IRS, identifies taxpayers whose payroll deductions appear to be in error so that they can remedy the deficiency.

## The Bottom Line

Withholding is the amount deducted from wages for taxes. All wage-earners in the U.S. have taxes withheld for federal, state, and local taxes if applicable. Employees must complete a Form W-4 to indicate what should be withheld for taxes based on their situation. The IRS provides a [tax withholding estimator](https://www.irs.gov/individuals/tax-withholding-estimator) that taxpayers can use to estimate how much they should withhold. Taxpayers receive a tax refund if excess taxes are withheld and end up with a tax bill if not enough is withheld during the year.

> **Article Sources**
>
> 1.  IRS. "[Tax Withholding](https://www.irs.gov/payments/tax-withholding)."
>     
> 2.  IRS. "[Topic No. 753, Form W-4 – Employee's Withholding Certificate](https://www.irs.gov/taxtopics/tc753)."
>     
> 3.  Cornell University, Legal Information Institute. "[Income Tax](https://www.law.cornell.edu/wex/income_tax#:~:text=However%2C%20all%20residents%20and%20all,%C2%A7%206011.)."
>     
> 4.  IRS. "[Tax Withholding: How to Get It Right](https://www.irs.gov/newsroom/tax-withholding-how-to-get-it-right)."
>     
> 5.  IRS. "[Form W-4](https://www.irs.gov/pub/irs-pdf/fw4.pdf)." Pages 1, 3.
>     
> 6.  IRS. "[Form W-4](https://www.irs.gov/pub/irs-pdf/fw4.pdf)." Page 1.
>     
> 7.  IRS. "[Form W-4](https://www.irs.gov/pub/irs-pdf/fw4.pdf)."
>     
> 8.  IRS. "[Publication 505, Tax Withholding and Estimated Tax](https://www.irs.gov/publications/p505)."
>     
> 9.  IRS. "[Topic No. 751 Social Security and Medicare Withholding Rates](https://www.irs.gov/taxtopics/tc751)."
>     
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>      
> 11.  IRS. "[Publication 590-A (2022), Contributions to Individual Retirement Arrangements (IRAs)](https://www.irs.gov/publications/p590a)."
>      
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>      
> 13.  IRS. "[People Should Have Tax Withheld From Unemployment Now to Avoid a Tax-Time Surprise](https://www.irs.gov/newsroom/people-should-have-tax-withheld-from-unemployment-now-to-avoid-a-tax-time-surprise)."
>      
> 14.  IRS. "[5.19.11 Withholding Compliance Program](https://www.irs.gov/irm/part5/irm_05-019-011r)."