Withholding Allowance

Definition of 'Withholding Allowance'


Employee-claimed exemptions on the tax form employers use to determine how much of an employee’s pay to subtract from his or her paycheck to remit to the tax authorities. The more allowances you claim, the less income tax will be withheld from your paycheck. The fewer allowances you claim, the more income tax will be withheld from each paycheck. In the United States, taxpayers use form W-4 to calculate and claim their withholding allowance.

Investopedia explains 'Withholding Allowance'


If you claim more allowances than you should have, you will owe money at tax time. If claiming too much allowances results in you significantly underpaying your taxes during the course of the year, you may have to pay a penalty when you file your annual tax return. If, after claiming zero allowances, you find that you do not have enough withheld from your paycheck, you can request that your employer withhold an additional dollar sum.

If you have more withheld than you should, you will receive a refund after you file your annual income tax return. Receiving a refund isn’t necessarily a good thing, though, as it represents money you could have been using throughout the year to pay your bills or invest. The government doesn’t pay interest on the balance when you have too much withheld.

The IRS provides a rough formula for how many allowances taxpayers should claim to have the correct amount withheld from each paycheck. You can claim one allowance for yourself, one for your spouse and one for each of your dependents. When your personal or financial situation changes (for example, you get married, take out a mortgage, or get a second job), you should recalculate your withholding allowance and submit a new form W-4 to your employer. If you don’t submit IRS form W-4 to your employer showing how many allowances you want to claim, your employer will assume that this number is zero, and you’ll have the maximum amount of income tax withheld from each paycheck.


Filed Under: ,

comments powered by Disqus
Hot Definitions
  1. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  2. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  3. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  4. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  5. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
  6. Balanced Investment Strategy

    A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
Trading Center