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Aug 01, 2017

We all know the exciting feeling of receiving our yearly tax refunds. That little, or sometimes large, check from The Internal Revenue Service (IRS) adds a little extra spending cash to our pockets. While this can be a welcoming site, it is important to remember that you are simply receiving the money back you earned in the previous year.

Federal withholding, also known as payroll withholding tax, is a tax on income that is withheld from your wages and sent directly to the IRS, which acts like a credit against your tax liability that you are required to pay that year. This revenue generated by the IRS goes into funding the services we have all become accustomed to, like Social Security, Medicare, and unemployment compensation. 

You can’t avoid withholding tax, but you have the ability to control the denomination that is withheld from each paycheck. It is in the best interest of the individual to accurately provide data on withholding tax through the  Form W-4 (Employee’s Withholding Allowance Certificate) to the best of their ability to ensure they’re not subject to penalties and interest charges. 

Now we know what withholding tax is and why we have it, but how is it calculated? 

This question can be complicated, as the result is dependent on a couple of varying factors. The employer determines the amount of withholding based upon the employee's information provided through the Form W-4. Factors that make up the calculation for withholding tax include filing status, number of exemptions, and amount of semi-monthly gross earnings. Furthermore, the calculation takes into account reductions such as Public Employees Retirement Systems (PERS) or TIAA/CREF retirement contributions. 

Four Steps to Calculate Your Federal Withholding Tax

Step 1: Determine the value of your total withholding allowances (exemptions) as claimed on your current Form W-4 by multiplying each by the semi-monthly amount of $168.80. 

Step 2: Subtract the amount of any salary reductions, such as PERS, TIAA/CREF or health insurance premium from your total semi-monthly amount.

Step 3: Subtract step one and step two to determine your taxable gross wages.

Step 4: Now, with your taxable gross wages subtract the amount from your pay cycle derived from the charts below. (Keep in mind your marital status, as this affects your withholdings. Refer to the charts below.)

*information provided by IRS data 

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