Withholding
Tax Glossary Term
Definition
Withholding is the portion of your paycheck that your employer sends directly to the IRS (and state tax authorities) on your behalf before you receive your pay. It covers federal income tax, Social Security tax, and Medicare tax. The amount withheld for federal income tax depends on the information you provide on Form W-4: your filing status, whether you have multiple jobs, dependents, and any additional amount you request to be withheld or deductions you claim. FICA withholding (Social Security and Medicare) is a fixed percentage and is not affected by your W-4. Getting withholding right is a balancing act. If too much is withheld, you will get a large refund when you file — which feels nice but means you gave the government an interest-free loan all year. If too little is withheld, you will owe money at tax time and may face an underpayment penalty if the shortfall is large enough and you do not meet the safe harbor thresholds. The IRS recommends checking your withholding whenever you have a major life change: new job, marriage, divorce, new child, or a significant income change. The new OBBBA deductions for tips and overtime are also a reason to revisit your W-4, since these above-the-line deductions may lower your expected tax liability. Your employer reports total wages and total withholding for the year on your W-2 in January.
Example
Gross biweekly pay: $3,000
Federal income tax withheld: $310
Social Security (6.2%): $186.00
Medicare (1.5%): $43.50
Total withholding: $539.50
Net pay: $2460.50 (before state tax)