What Does Withholding Tax Mean?

What does withholding tax mean and what does it have to do with your payroll taxes? Find out how your payroll taxes get paid each year so you can owe the IRS less come tax season.

We pay taxes in many ways, through sales tax when we buy certain things, when we pay property tax, or when we get a statement back from the IRS during tax season. But we also pay taxes through withholdings on our paychecks. But what does withholding tax mean? Find out the answer to what does withholding tax mean and how it applies to you and your taxes in this article. 

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What Does Tax Withholding Mean?

When you hear the term tax withholding or taxes withheld, that is referring to the amount of taxes that are taken from your paychecks, by your employer, to pay taxes on your behalf. One of the primary ways that taxpayers pay their taxes is through income tax. Income tax is paid when employees get tax withheld from their paychecks each month by their employer. 

Then, at the beginning of every new year, you will either come short and still owe federal income taxes (FIT), or the earned income taxes you paid will be enough and you won't get a tax bill from the IRS. In fact, if you overpaid in federal income tax, you can get a tax refund from the IRS to cover the extra tax money you paid.

So the simple answer to what does withholding tax mean is that it refers to how much you decide to pay in taxes through your paychecks.

How Do Tax Withholdings Work?

Tax withholdings start with the W4 tax form you fill out when starting a new job. If you start multiple jobs, then you may end up filling out multiple W4s. A W4 form is different from a W2 tax form. Employees get a W2 form at the beginning of each year before tax season. This form then helps workers file their tax returns. A W4 form is something new employees fill out when starting a job. 

On the tax form W4, new hires can outline the payroll tax they want taken out of each paycheck for their employers. These payroll taxes go toward things like social security and Medicare taxes. How you set up your withholdings will determine your take home pay after taxes. This is essentially the answer to what does withholding tax mean.

Your paycheck pre taxes being taken out is going to be a larger sum. Some employees decide to withhold less taxes from their paychecks so that they can see more of that pretax money in their take home pay. If you do this, you can get a larger take home pay each month, but you may end up owing more in taxes next tax season. 

Otherwise, if you allow your employer to withhold more taxes from your paychecks, you will be less likely to owe tax money next tax season. You may even end up with a tax refund. 

What is Publication 15-T?

While learning the answers to what does withholding tax mean, you may come across another tax term: publication 15T. Publication 15T is a document from the IRS that outlines the official Federal Income Tax Withholding Methods employers should use when calculating income tax for their employers' paychecks.

So what does this have to do with the question, what does withholding tax mean? It means that this publication outlines the calculating methods your employer will use to take taxes out of your paychecks. 

W4 Allowances Meaning

Another tax term you will come across frequently in learning what does withholding tax mean, is W4 allowance. W4 allowances are kind of like tax exemptions that can specifically be used on a W-4 form. W4withholding allowances are things that reduce how much your employer will take out of your paychecks for paying taxes. 

These allowances are also calculated on the W4 tax form and is information your employer's payroll department will use to adjust your paychecks. So how do W4 allowances work? First, an employee will fill out their W4 form with their allowances. What kind of withholdings you can apply to your form depends on your tax filing status

Basically, with regards to what does withholding tax mean, W4 withholdings take money out of your paycheck to pay for taxes while W4 allowances reduce your tax withholdings so you can get more of your pretax money now. 

Regular withholding allowances

Depending on your tax filing status, how many dependents you have, and what kind of tax exemptions you qualify for, your regular withholding allowances may be able to help you take more money home each month while still not owing unpaid taxes at tax season. 

The key to this is making sure you are claiming regular withholding allowances and not more allowances then you actually qualify for. Hiring a financial advisor or talking with a tax filing professional can help you understand better what kinds of withholdings and allowances you can claim. 

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How Much of My Paycheck Goes to Taxes?

So how much of your paycheck goes to taxes vs how much goes into your wallet each month? Knowing what percentage of my paycheck is withheld for federal taxes can help you be smarter with your money. With this knowledge, you can make sure you are getting the most out of each paycheck and not overpaying in taxes.

Find out how much tax is deducted from your paycheck by taking a closer look at your pay stubs. The information on your pay stubs, or payment summaries, are how you will calculate taxes on paychecks. 

Your paystub should have an outline that goes over your total earnings, total deductions, total taxes, and your net pay. Net pay is another word for your take home pay. This is the amount of money you actually get after all taxes and deductions have been taken into account.

So you should be able to see exactly how much of your paycheck goes to taxes on your paystub by looking at the "total taxes" section. From there, calculating what percentage of your paychecks is withheld for federal taxes is easy. 

All you have to do is divide the "total taxes" amount on your paystub from your "total earnings" amount. Then, move the decimal point to the right 2 spaces and you have your percentage.

For example:

Total Earnings = 2,000

Total Taxes = 400

400 / 2,000 = 0.20 (20%)

You don't want to include the total deductions amount in this calculation because this amount has to do with other payments that get taken out of your paycheck by your employer. Total deductions could include health insurance payments, 401K payments, and more. 

In Conclusion,

Learning the answers to what does withholding tax mean can really help you when it comes to taxes. It's important to be mindful about your paycheck, your federal income tax, and your withholdings. Check your withholdings on form W4 to see how your withholdings and allowances are currently set up. Employees can submit new W4 forms as needed. Form W4 is even meant to be updated as your employee withholding situation changes.