Paycheck Deductions: Withholdings and Allowances

September 05, 2018

Paycheck deductions

  1. As an employee, your paycheck will be docked to pay for mandatory deductions like income tax and Social Security tax.
  2. When you start working you will usually fill out an IRS Form W-4.
  3. Your employer withholds a part of your paycheck to pay your taxes depending on what you enter in this form.
  4. The amount withheld depends on the number of allowances you claim, likely one or two for college students and recent grads.

What is withholding?

Even though "tax day" is in April, you are obligated to pay portions of your taxes throughout the year. Generally, if you are working as a standard employee, you do not have to remember to do this yourself. Within your first few days, your employer will ask you to fill out an IRS Form W-4, which walks you through computing an estimate of how much you will owe in taxes.

Your employer will transfer part of your paycheck to the IRS to cover your expected tax bill. If your forgo more of your salary than you owe in taxes, at the end of the year, you'll receive a tax refund. Conversely, if your employer withholds less than you owe in taxes, you'll have a tax bill at the end of the year, potentially with a late penalty.

One important thing to understand is that your selections on Form W-4 do not determine precisely how much tax you owe. Your answers only help estimate your taxes. Form W-4 only controls how much is withheld from your paycheck to help incrementally pay your taxes. Make sure to fill it out accurately to avoid getting hit with a nasty surprise at the end of the year, and to avoid giving the IRS an interest-free loan.

Does everyone need to withhold taxes?

All employees must fill out a W-4, the form mentioned above that determines your withholding allowances. In other words, all employees will have taxes withheld from their paycheck. The key word here is employees. Independent contractors—in other words, people who are self-employed but provide paid services to others—are responsible for paying their own taxes quarterly or annually, meaning their taxes are not withheld from their compensation. Instead of form W-4, independent contractors typically fill out form 1099.

How many allowances should I claim?

Allowances are frankly a little confusing. Here's a helpful rule of thumb: the more allowances you claim, the less federal income tax your employer will withhold from your paycheck (the higher your take-home pay). The fewer allowances you claim, the more federal income tax your employer will withhold from your paycheck (the lower your take-home pay).

Most college students and recent grads will claim either one or two allowances on Form W-4. The main question to answer is whether someone else will claim you as a dependent. Your parents may claim you as a dependent if the following conditions are met:

  • You are under 24.
  • You were in school for 5 months of the year.
  • They provided at least 50% of your support, including tuition.

If your parents do not claim you as a dependent, then you can claim an allowance on line A. If you parents can claim you as a dependent, you should speak to them to determine who will claim the allowance.

If you have a child or dependent, you can file as head of household and claim that allowance.

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