What Determines Withholding Amounts?
Whenever you get a paycheck, you will notice that you do not receive all your earnings because your employer withholds money for the taxes you owe on your earnings. Besides how much you get paid, several other factors affect how much your employer withholds for federal income taxes.
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Filing Status
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Whether you request your withholding to be based on the single filing status rate or the married filing status rate affects how much is withheld. The married filing status tax brackets are larger, which means that more income is taxed at a lower rate, which reduces your withholding. However, if you plan to file a separate return from your spouse, or prefer to get a tax refund, you can claim "Married, but withhold at higher Single rate" to have more money withheld.
Pay Period Frequency
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The number of pay periods per year affect the amount you have withheld for each paycheck because the value of each allowance is smaller when you have more pay periods. This affects people who work seasonal jobs more than those working full time. This is because the number of pay periods you intend to work during the year does not affect your withholding. For example, if you just work for two months during the summer, the withholding formula anticipates you working the same amount for each month during the year. In this example, if those two months represent your entire earnings for the year, you will have too much withheld.
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Allowances Claimed
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Allowances make a significant difference in the amount of money your employer withholds from your income taxes. When you complete your Form W-4, each allowance lowers the amount of your paycheck subject to income tax withholding. You determine your allowances by completing the Personal Allowances Worksheet or the Deductions and Adjustments Worksheet on the Form W-4. The value of each allowance over the course of the year equals one personal exemption. For 2011, that means that over the course of a year, each allowance claimed decreases your paycheck subject to withholding by $3,700.
Extra Withholding Requested
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You have the ability to request your employer withhold extra money from your paycheck each pay period for income taxes by writing the requested amount on line 6 of Form W-4. This is useful when you have income from sources that do not withhold taxes, such as interest or investments. For example, if you have significant interest income that you anticipate will raise your income tax liability by $1,040 and you are paid weekly, you might want to have an extra $20 taken out each week to cover the anticipated extra tax.
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