Differences Between Tax Withholding of 1 or 0
The Current Tax Payment Act of 1943 gave the U.S. government the legal right to collect federal income tax from wage earners via tax withholding. The Internal Revenue Service regulates federal income tax withholding laws. The employee's withholding depends on many factors, including the number of allowances she claims on her W-4 form. The difference between claiming one or zero on the form impacts her taxable income.
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Form
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The employer gives a new employee a W-4 form to complete. The employee writes his withholding conditions on the form, such as filing status and allowances. He determines his allowances based on his personal and financial situation. For example, he can claim an allowance for himself if no one can claim him as a dependent, one for each of his children he supports and one for his spouse. Each allowance reduces his taxable income -- the more allowances he claims, the less his taxable income. Federal income tax withholding also depends on the employee's filing status. An employee who fails to submit a W-4 form is subject to withholding of single with zero allowances -- the highest tax bracket.
Allowance Difference
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The employer uses IRS Circular E for the appropriate tax year to determine the amount for each allowance. One withholding for a weekly payroll in 2011 is $71.15. The employee gets nothing if she has no allowances. For example, if she earns $500 weekly and claims single with one allowance, her tax withholding is $51. If she claims single with zero allowances, her withholding is $62.
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Filing Status Difference
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The employee's withholding varies if he has the same earnings as shown in the example above, claims the same amount of allowances but has a different filing status. If he earns $500 weekly and claims married with one allowance, his tax withholding is $28. If he claims married with zero allowances, his withholding is $37. Claiming married places him in a lower tax bracket than single.
Considerations
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It is important to remember that tax withholding largely depends on income, filing status, allowances and the IRS withholding tax tables. If the employee is exempt from federal income tax and claims it on her W-4 form, she is not subject to withholding.
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References
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