The percentage of federal withholding tax deducted from your paycheck varies, depending on the amount you earn and the number of exemptions you claim on your W-4 form. The exemptions you claim on your W-4 should reflect your expected tax bracket when you file your tax return. The higher your income and the fewer exemptions you claim, the more money will be withheld from your paycheck.
What is Federal Withholding?
Federal tax withholding is a system in which money is deducted from your paychecks during the year and set aside to pay your anticipated federal income tax liability at the end of the year. The income tax system in the U.S. requires that you pay estimated taxes on your earnings throughout the year. If you are self-employed and don't receive a paycheck, you must file quarterly tax returns and pay estimated tax on your earnings.
What is a W-4 Form?
As an employee, you must complete a W-4 form that tells your employer how many exemptions you are claiming on your federal tax withholding. You can claim as many exemptions on the W-4 as you can lawfully claim on your income tax return. If you claim fewer exemptions, more tax will be withheld from your paycheck. Some people claim zero exemptions to ensure that they will receive a tax refund rather than owing taxes.
Effect of Exemptions
The more exemptions you claim, the smaller the percentage of federal tax withheld from your paychecks. Each exemption you claim decreases the percentage of federal tax withheld from your check. Claiming an excessive number of exemptions beyond what you are legally entitled to claim may result in penalties being assessed by the IRS. In addition, doing this will create a larger tax bill for you at the end of the year, as little or no tax was withheld from your paychecks.
Calculating Federal Withholding
To calculate how much federal tax should be withheld from your checks, employers use federal tax withholding tables that list the percentage of taxes to withhold based on your earnings and the number of exemptions you claim on your W-4. The highest withholding rate is equal to the highest tax bracket, which is 35 percent as of 2012.
When you file your federal income tax return, the amount of money withheld during the year will be subtracted from the tax you owe. If the amount withheld exceeds your tax liability, you will receive a tax refund.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."