Withholding

How it works

Withholding is how the pay-as-you-go system works for most employees. Your employer figures the amount from what you earn, how often you are paid and your Form W-4, where you can report your filing status, a second job or working spouse, dependents and other credits, other income, deductions and any extra amount to withhold. Social Security and Medicare taxes are withheld too, but as set percentages of wages that your W-4 does not change.

When you file your return, the year’s withholding is compared with the tax you actually owe. If more was withheld, the difference comes back as a refund; if less, you pay the balance, and you may also owe a penalty if too little was paid during the year. A refund is your own money coming back, not a bonus, and over-withholding means going without that money until the refund arrives.

Because withholding rests on estimates, it can drift out of line as life changes. Marriage, divorce, a new child, buying a home, or income from investments or self-employment can all change your tax. The IRS Tax Withholding Estimator compares a projection of your tax with what is being withheld, and you can generally give your employer a new Form W-4 whenever you want to adjust.

Related terms

Sources and further reading

• IRS: Tax withholding
• IRS: Publication 505 — Tax withholding and estimated tax

Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.