Tax Withholding
Tax withholding is the amount your employer deducts from each paycheck and remits directly to the IRS on your behalf. It is an advance payment toward your annual tax liability — not an extra tax. If too much is withheld, you get a refund; too little, and you owe at filing.
Employers calculate withholding based on your W-4 form, which tells them your filing status, dependents, and any additional amounts to hold back. The IRS provides withholding tables that employers use to determine the right amount for each pay period.
A large tax refund is not free money — it means you gave the government an interest-free loan all year. Ideally, withholding covers your liability within $1,000 so neither party owes a significant amount.
You can adjust withholding anytime by submitting a new W-4 to your employer. Use the IRS Tax Withholding Estimator to find the right settings for your situation.
Put this into practice with our free calculator:
Open calculator →Related terms
- FICA Taxes
- FICA (Federal Insurance Contributions Act) taxes fund Social Security and Medicare. Employees pay 7.65% of gross wages — 6.2% for Social Security (up to the wage base) and 1.45% for Medicare — and employers match these contributions.
- W-2 Form
- A W-2 (Wage and Tax Statement) is a form employers send to employees each January. It reports total wages paid and all taxes withheld during the prior year. You need it to file your federal and state income tax returns.
- Gross Income
- Gross income is your total income before any taxes, deductions, or withholdings. It is the starting figure used by lenders for DTI calculations and by tax authorities to determine your tax bracket.
- Effective Tax Rate
- Your effective tax rate is your total tax paid divided by your total income, expressed as a percentage. It is always lower than your marginal rate in a progressive tax system.