The Federal income tax is based on a \u201cpay-as-you-go\u201d system. There aretwo ways to pay as you go: withholding tax or\u00a0estimated tax<\/a>. This article discusses withholding tax (also referred to as \u201ctax withholding\u201d).<\/p>\n If you work at a job, your employer most likely withholds income tax<\/a> from your paychecks. (Tax may also be withheld from other types of income \u2013 such as commissions, bonuses, and pensions.) The tax withheld is sent to the IRS on your behalf and the funds are applied to your Social Security, Medicare, and income taxes for the year. The amount withheld in each category is reported on your\u00a0Form W-2 (Wage and Tax Statement)<\/a>, which you receive from your employer.<\/p>\n NOTE: If you live in a State that imposes income tax, your State income tax is usually withheld as well.<\/em><\/p>\n The amount of tax withheld from your regular pay depends on two things: how much money you earn and the information you provide on\u00a0IRS Form W-4 (Employee\u2019s Withholding Allowance Certificate)<\/a>. Using Form W-4, you must report how many personal allowances you are claiming for the tax year. The number of allowances you can claim is based on your particular situation. There is a \u201cPersonal Allowances Worksheet\u201d on Page 3 of Form W-4 to help you determine this number.<\/p>\n Note that each allowance you claim will lower the amount of tax withheld from your earnings. It\u2019s generally recommended that you have 90% of your estimated income taxes withheld from your wages. You can find out if you\u2019re withholding the right amount by using the IRS Withholding Tax Calculator<\/a> online tool.<\/p>\n Social Security and Medicare taxes are automatically withheld by your employer and have fixed rates.<\/p>\n The Social Security tax rate is currently 6.2% for the employer and 6.2% for the employee, which is 12.4% total. The\u00a0Social Security tax<\/a>\u00a0has a wage base limit of $128,400 for the 2018 tax year. In other words, it\u2019s the maximum amount of earnings that is subject to Social Security tax. This means that most employees are required to pay 6.2% Social Security tax on the first $128,400 of their wages.<\/p>\n The Medicare tax rate is currently 1.45% for the employer and 1.45% for the employee, which is 2.9% total. Unlike the Social Security tax, the Medicare tax has no wage base limit. This means that all covered wages are subject to Medicare tax.<\/p>\n See IRS Publication 15 (Employer\u2019s Tax Guide)<\/a> for more information.<\/p>\n The amount of\u00a0Federal income tax\u00a0withheld from your pay is based on the information you provide on IRS Form W-4. When you start a new job, you are required to fill out Form W-4 and give it to your employer. If you need\/want to make changes to your withholding tax at any point during the year, you must complete and submit a new W-4 tax form.<\/p>\n For example, if you find that too much or too little tax was withheld last year, you can fill out a new Form W-4 to adjust your withholding. Additionally, certain life events (such as marriage, divorce, or the birth of a child) may change your\u00a0filing status<\/a>\u00a0or the number of allowances you can claim. In these cases, you will need to give your employer a new Form W-4 to adjust your withholding status and\/or number of allowances.<\/p>\n On Form W-4, there are three main types of information that your employer will use to calculate your withholding tax:<\/p>\n The more allowances you claim, the less income tax your employer will withhold. Claiming \u201c0\u201d allowances means you will have the most tax withheld from your pay. Based on your withholding status and allowances, your employer will use the IRS Income Tax Withholding Tables to determine how much Federal income tax to withhold for you.<\/p>\n Tax Form W-4 includes worksheets to help you determine the number of withholding allowances you can claim. These worksheets are for your purposes only \u2013 do not give them to your employer.<\/p>\n RELATED: Understanding Payroll and Withholding Taxes<\/a><\/p>\n If you have too much tax withheld from your wages during the year, you will receive the overpayment as a\u00a0tax refund<\/a>\u00a0after you file your return<\/a>. But if you withhold too little, you may have to make Estimated Tax payments or be subject to an underpayment penalty.<\/p>\n If you don\u2019t have any tax withheld from your pay (or you don\u2019t pay enough tax through withholding), you may be required to pay estimated tax. Generally, estimated tax must be paid quarterly in four equal installments. For more information, see\u00a0\u201cWhat Is Estimated Tax & Who Does It Apply To?\u201d<\/a><\/p>\n If you don\u2019t pay enough tax, either through withholding or estimated tax payments, you may be subject to a penalty for underpayment. According to the IRS, you could owe a penalty if your total payments (from withholding and estimated tax) do not equal at least 90% of your tax liability for the year, or 100% of your prior year tax, whichever is less.<\/p>\nHow Is Withholding Tax Determined?<\/h2>\n
Withholding: Social Security and Medicare Tax<\/h2>\n
Withholding: Federal Income Tax<\/h2>\n
\n
What Happens If You Don\u2019t Withhold Enough Tax?<\/h2>\n
Estimated Tax<\/h2>\n
Underpayment Penalty<\/h2>\n