What Is the Effect of Each Withholding Allowance on the W-4?

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Your employer uses your W-4 form to help figure out the amount of federal income tax to withhold from your paychecks. The withholding amount depends on the number of allowances and filing status you claim on the W-4 and the federal tax withholding tables in IRS Circular E. Each allowance impacts the amount of your pay that is subject to withholding.

Identification

You are supposed to claim all of the allowances that you’re entitled to on line 5 of the W-4. Specifically, go through lines A to G of the form and claim the allowances that apply to your situation, such as an allowances for yourself if you’re single with only one job, one for each of your dependents, and depending on your income and marital status, one or two allowances for each eligible child under the child tax credit program. All of these allowances add up to the amount that you put on line 5 of the W-4.

Effect

Each allowance gives you an amount that lowers your taxable earnings. Therefore, the more allowances you claim, the less your tax liability, and the fewer you claim, the more tax you pay. It can be tempting to claim more allowances than you’re entitled to; however, this usually results in an underpayment of federal income tax when you file your tax return with the IRS; you end up owing the agency. If you cannot pay off the balance within the required time frame, penalties and interest apply. Therefore, claim only allowances that you can account for when you file your tax return.

Calculation

To determine the amount per allowance, consult the IRS Circular E’s percentage table (see page 35 of the 2011 version). In 2011, the agency gives $14.23 per allowance based on a daily payroll, $71.15 weekly, $142.31 biweekly, $154.17 semimonthly, $308.33 monthly, $925 quarterly, $1,850 semiannually, and $3,700 annually. If you earn $450 weekly and claim two allowances, $307.50 is subject to withholding ($450 - $71.15 x 2). If you had one allowance, $378.85 would be subject to withholding ($450 - $71.50).

Considerations

To ensure that you claim the appropriate number of allowances on the W-4, you may use the IRS withholding calculator, which helps you to avoid underpaying or overpaying federal income tax. Your employer likely does not have to manually subtract allowances and calculate federal income tax amounts. He can simply obtain the withholding amount from the Circular E’s wage bracket table that corresponds to your filing status, taxable wages, allowances and pay period (see pages 38 to 57 of the Circular E).

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