Withholding
Mar 13 '01
The Bottom Line Withholding is the amount of money deducted per paycheck and sent to the IRS by your employer to cover your tax liability for the year.
Definition
Withholding-An amount of money that your employer takes out of each of your paychecks and sends to the IRS on your behalf in an attempt to cover your income tax.
A paycheck includes salaries; tips; wages.
W-4 Form (Employee's Withholding Allowance Certificate)
The amount of money that your employer withholds is based upon the information you list on your W-4 Form which is filed with your employer. The W-4 Form is a worksheet which helps you determine how many exemptions/allowances to claim on your paycheck so that you have (in theory) the correct amount of income tax taken out of each paycheck to cover your tax liability for the year. Therefore, if you claim 0 exemptions, more money will be withheld from each paycheck than if you claim 3 exemptions.
A new W-4 Form may be filed with your employer at any time during the year if you would like to change your withholding exemptions/allowances.
Exempt Status
Your employer will not withhold any federal income tax from your paycheck if you claim exempt. You may claim exempt if you've had no income tax liability for the previous year and if you expect to have no income tax liability for the current year. You must still complete a W-4 Form to be filed with your employer, just make sure to write exempt on it.
Estimated Tax Payments
Most American's over-withhold on their paycheck, so the paying of estimated taxes every quarter should not be an issue. However, I thought I should mention a simplified version of the rule. If your tax liability for the year is more than $1,000 you will not only be penalized, but you will be required to pay estimated quarterly taxes during the year.
Withholding
The amount deducted per paycheck and sent to the IRS by your employer in order to cover your tax liability for the year.
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