Federal income tax can take a big chunk out of your paycheck. However, if you qualify for tax allowances, you can reduce your withholding. Allowances give you a certain amount that reduces the amount of federal income tax that comes out of your wages. The state might permit you to claim allowances to reduce your state income tax withholding. Other factors, such as pre-tax deductions, may reduce your withholding as well.
The allowances you claim on line 5 of the Employee’s Withholding Allowance Certificate of Form W-4 reduce your taxable wages. The more allowances you have, the less you are withholding. As of 2013, the Internal Revenue Service gives $75 for one allowance if you’re paid weekly, $150 if you’re paid biweekly, $162.50 for a semimonthly payroll and $325 for a monthly payroll. To figure the sum of your allowances, multiply your total number of allowances by the amount the IRS gives for each one. The result is your taxable wages. To avoid owing the IRS at tax time, do not claim any allowances that you are not entitled to take.
Depending on the state, you may be able to claim allowances -- which reduce your taxable wages for state income tax purposes -- on your state tax form. The sum of each allowance varies by state. You may view the state revenue agency’s website to get the withholding rates for your state. Note that some states, such as Arizona and Pennsylvania, do not use an allowance system. Instead, employers withhold based on a flat percentage.
The marital status that you claim on line 3 of the withholding certificate section of your W-4 impacts your withholding amount. “Married” puts you in the lowest withholding tax bracket. “Single” and “Married, but withhold at higher Single rate” places you in the highest withholding tax range.
Cafeteria plan benefits, such as Section 125 health and life insurance, dependent care assistance, health savings accounts and life insurance, allow you to make your contributions with pre-tax money. If you participate in your employer’s pretax benefits program, your payments are taken out of your gross wages before taxes. This process reduces your taxable wages and withholding. Other types of pre-tax deductions include 401(k), 403(b) and 457(b) retirement plans and transit and parking benefits.
Though most wages are taxable, some are not. If you receive nontaxable wages, your employer does not count them in your gross wages when calculating taxes. Nontaxable wages include qualified employer reimbursements for mileage and expenses such as lodging, travel and moving.
Withholding allowances do not reduce your FICA deductions, which include Social Security and Medicare taxes and are withheld at flat percentages. If you have pre-tax deductions, you may find that not all of them reduce your taxable wages. This is because each pre-tax deduction has its own tax implication. For example, pre-tax medical and dental contributions are excluded from federal income tax and FICA taxes. However, pre-tax 401(k) deductions are exempt from federal income tax, but not FICA taxes.
- TurboTax: Form W-4 and Your Take-Home Pay
- TurboTax: What Is "Cafe 125" on a W-2 Tax Form?
- IRS.gov: Form W-4 (2013)
- IRS.gov: Publication 15
- Arizona Department of Revenue: Form A-4
- Pennsylvania Department of Revenue: What Is the Employer Withholding Tax Rate For 2013?
- IRS.gov: FAQs For Government Entities Regarding Cafeteria Plans
- Optimum Solutions: How to Calculate Taxable Wages
- Michigan.gov: Frequently Asked Questions
- IRS.gov: 401(k) Plan Fix-It Guide - 401(k) Plan - Overview
- Internal Revenue Service. "Topic No. 753 Form W-4 – Employee's Withholding Certificate." Accessed Sept. 22, 2020.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.