Withholding
The amount of federal and state income tax your employer deducts from each paycheck and sends to the IRS on your behalf throughout the year.
Tax withholding is the pay-as-you-go system the IRS uses to collect income taxes. Your employer withholds a portion of each paycheck based on the information you provide on Form W-4, including your filing status, dependents, and any additional withholding you request.
The goal of withholding is to match your total payments to your actual tax liability so you neither owe a large balance nor receive an oversized refund at filing time. If too little is withheld, you may owe penalties for underpayment. If too much is withheld, you are essentially giving the government an interest-free loan.
You can adjust your withholding at any time by submitting a new W-4 to your employer. Major life events — marriage, divorce, having a child, buying a home, or starting a side business — are good triggers to review your W-4. The IRS Tax Withholding Estimator is a helpful tool for calibrating your withholding.
How it works
Withholding is the mechanism that makes the US tax system pay-as-you-go rather than pay-once-a-year: your employer deducts a portion of federal (and often state) income tax from every paycheck and sends it to the IRS on your behalf throughout the year, based on the information you provide on Form W-4. The goal is for your cumulative withholding by year-end to roughly match your actual tax liability, so you neither owe a large balance nor overpay and wait for a big refund.
You control withholding by filling out Form W-4 when you start a job, and you can update it at any time by submitting a new W-4 to your employer's payroll department — there is no need to wait for tax season. The withholding amount taken from each paycheck flows onto your W-2's Box 2 for federal tax (and the state boxes for state tax), and when you file your return, that total withholding is applied as a payment credit against whatever your actual tax liability turns out to be.
If too little is withheld across the year, you can owe an underpayment penalty even if you pay the full balance by the filing deadline, because the IRS expects tax to be paid roughly as income is earned, not caught up all at once. If too much is withheld, you are effectively giving the government an interest-free loan until you get it back as a refund. Major life events — marriage, divorce, a new child, buying a home, or starting a side business — are the classic triggers for reviewing and adjusting your W-4, since your prior withholding settings may no longer match your new situation.
Example: withholding versus actual tax owed
Over the course of the year, your employer withholds $9,000 in federal income tax from your paychecks based on your W-4 elections.
When you file your return, your calculated tax liability comes out to $8,200. Because you had $9,000 withheld against an $8,200 liability, you receive an $800 refund — the difference between what was withheld and what you actually owed.
Frequently asked questions
How do I change how much tax is withheld from my paycheck?
What happens if too little tax is withheld from my paycheck?
Is a big tax refund a good thing?
Related Terms
W-2
A tax form employers send to employees each year reporting wages earned and taxes withheld, including federal income tax, Social Security, and Medicare.
Pay-As-You-Go
The US tax system requires taxes to be paid throughout the year as income is earned, either through employer withholding or quarterly estimated tax payments.
Tax Refund
Money returned to you by the IRS when your total tax payments (withholding + estimated payments + refundable credits) exceed your tax liability for the year.
Penalty
A charge imposed by the IRS for filing late, paying late, or underpaying estimated taxes. Common penalties include failure-to-file (5% per month) and failure-to-pay (0.5% per month).