What Is a Withholding Allowance?
Withholding allowance refers to an exemption that reduces how much income tax an employer deducts from an employee's paycheck. In practice, employees in the United States use Internal Revenue Service (IRS) Form W-4, Employee’s Withholding Allowance Certificate to calculate and claim their withholding allowance. The employer then uses the W-4 information to determine how much of an employee’s pay to subtract from their paycheck to remit to the tax authorities. The total number of allowances you are claiming is important—the more tax allowances you claim, the less income tax will be withheld from a paycheck; the fewer allowances you claim, the more tax will be withheld.
How a Withholding Allowance Works
The amount of withholding is based on your filing status—single, married, or "married, but withhold at the higher Single rate"—and the number of withholding allowances you claim on your W-4. To avoid trouble when you file your taxes (or to keep from giving the government an interest-free loan), you need to take time to figure out how many allowances you should claim.
Calculating Your Withholding Allowance
The IRS provides a rough formula for how many allowances taxpayers should claim in order to have the correct amount withheld from each paycheck. The Personal Allowances Worksheet on page 3 of Form W-4, will help you figure how to choose that number, based on tax-relevant aspects of your life. In addition to your filing status, allowances are based on, for example, whether you can claim the child tax credit for a qualifying child (or a dependent who is not a qualifying child), and whether you itemize your personal deductions instead of claiming the standard deduction, whether you or your spouse have more than one job, and what your total income is. Personal exemptions, which have been eliminated by the Tax Cuts and Jobs Act for 2018 through 2025, are no longer taken into account in figuring withholding allowances.
For example, if you are single with no children and will take the standard deduction, you can claim one withholding allowance for yourself and a second if you are single with only one job, for a total of two. If you are married filing jointly with no children and claim the standard deduction, you can claim one for yourself, one for your spouse—and a third if you have only one job, that spouse doesn't work (or if your second job or the spouse's job brings in $1,500 or less). With children or other dependents, it gets more complicated and the number of allowances you should claim are income-based. But the Personal Allowances worksheet can help you figure it out. There are also worksheets for two-earner families and for taxpayers who itemize rather than take the standard deduction or have additional income. You'll find them all on Form W-2.
Fortunately, you can check your withholding choice using the IRS Withholding Calculator. This will enable you to see whether you’ve claimed the right number of withholding allowances.
Yes, You Can Be Exempt from Withholding
But it's not easy to receive that status. You can claim the withholding exemption 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 and you expect the same for the current year. You simply write “Exempt” on Form W-4.
Important: You must do this annually; the exemption doesn’t automatically carry over. The exemption from withholding for 2018 will expire on February 15, 2019, unless you claim an exemption on the 2019 Form W-4 and file it with your employer by this date.
When to Recalculate Allowances
File a new Form W-4 with your employer whenever your personal or financial situation changes (e.g., you get married, you have a baby, your spouse enters or leaves the workplace). The new withholding allowances go into effect no later than the first payroll period ending on or after the 30th day you give the revised form to your employer. Your employer may implement it sooner but isn’t required to do so.
You can also request that a specific dollar amount be withheld, regardless of your withholding allowances. This may be helpful if you receive a year-end bonus or simply want to boost withholding near the end of the year (perhaps to cover taxes on investment income, such as capital gain distributions made at the end of the year). You can also request that an additional amount be withheld with Form W-4; there’s a special line for it.
What If You Claim Too Many Allowances?
If you claim more allowances than you are entitled to, you are likely to owe money at tax time. If claiming too many allowances results in your 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, on the other hand, you have more income 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: It represents money you could have been using throughout the year to pay your bills or invest for the future.