What Is Federal Tax Withholding?

The "pay as you go" tax system requires workers to pay their taxes as their income is earned throughout the year. Without regular tax withholding from your paycheck, you would face a massive tax bill every year, unless you had some other reliable method of setting the money aside. Nevertheless, with a W4 form you can exercise some control over the amounts withheld from your salary.

A Little Tax History

The Treasury Department began tax withholding during World War II, when the government was spending heavily to finance the war effort. Before the change, employees paid their taxes from the previous year in quarterly installments. The change was made because the federal government was borrowing and spending heavily to finance the war effort. The withholding system remained in place when the war ended as tax rates rose and federal spending continued to increase.

Withholding Certificate

All employees should have a W4 form on file with their employer. With this form, also known as a withholding certificate, you claim allowances used by the employer to figure the amount to withhold from your paycheck. The employer deducts the proper amount and forwards the money to the Internal Revenue Service, which keeps track of your payments. You can request another W4 at any time to adjust your withholding amount.


Each allowance shelters $3,950 of your income from withholding. The unsheltered balance is withheld at a certain rate that depends on whether you are married, single or head of household. If you claim zero allowances, then none of your income is sheltered from withholding. Claiming 10 allowances -- the maximum -- shelters $39,500. The W4 form includes a worksheet that will help you figure the correct number of allowances to claim. Under limited circumstances, you can also request no withholding.

Withholding and Refunds

If too much income tax is withheld from your check, you get a refund when you file a tax return. If too little is withheld, you owe the IRS additional tax. Refunds represent the repayment of your interest-free loan to the federal government. If you prefer, you can adjust withholding and save the extra money through a payroll savings plan. When you file your tax return, you can then simply pay these funds out to yourself instead of waiting for an IRS refund.