What Are Withholding Allowances? | Payroll Exemptions and More
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What Are Withholding Allowances?

The new 2020 IRS Form W-4 eliminated withholding allowances. However, many states continue to use withholding allowances to determine state income tax withholding. 

When an employee begins working for you, they must fill out Form W-4. You may want to provide Form W-4 help due to the potentially confusing language of this document. On the form, employees can claim withholding allowances. But, what are withholding allowances?

What are withholding allowances?

Withholding allowances are exemptions from income tax. Employees can claim withholding allowances on Form W-4, which you use to calculate the total withholding. As an employee claims more exemptions, you will withhold less income tax from their wages. As an employee claims fewer exemptions, you will withhold more income tax from their wages.

How many allowances can an employee claim?

Employees can claim as many withholding allowances as applies to them. Employees can use the worksheets on Form W-4 to determine their withholding allowances.

Employees can claim federal tax withholding allowances for:

  • Themselves
  • Their spouse
  • Dependents
  • Filing as head of household
  • Child care expenses
  • Child Tax Credit

The more situations on the worksheets that apply to the employee, the more withholding allowances the employee can claim.

Employees can also be completely exempt from federal income tax withholding. To be exempt, an employee must meet all exemption requirements and give you a Form W-4 saying they are exempt. Also, in order to claim the Form W-4 exempt status, the employee must meet the Form W-4 deadline for exemptions each year.

Can an employee change their withholding allowances?

Employees can change their withholding allowances at any time. Employees might want to change their withholding allowances if they have a financial or family status change. Here are some reasons someone might change their withholding allowances:

  • Marriage or divorce
  • Birth or adoption of a child
  • Employee starts a second job
  • Spouse has an employment change
  • Decides to itemize deductions
  • Too much or too little is being withheld

If an employee wants to change their withholding allowances, they need to submit a new Form W-4 to you. When you receive a new Form W-4, the form goes into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received the new Form W-4.

For example, Marcia gives you a new Form W-4 on Sept. 23, 2016. You pay Marcia each week on Friday. You must implement the new Form W-4 no later than the first payroll period following Oct. 23, 2016 (30 days after Sept. 23). In this case, the latest you can apply the new withholding changes is Oct. 28, 2016.

How much do I withhold from employee wages?

You will not withhold the same amount of federal income tax from each employee’s wages. How much you withhold depends on how much the employee earned and how many withholding allowances the employee claimed.

You will use income tax withholding tables to calculate how much federal income tax to deduct from employee wages. You can either use the wage bracket method or the percentage method to calculate federal income tax withholding. You can find both methods and their tables in IRS Publication 15.

With both methods, you need to know the withholding allowances of each employee. You will then use your payroll frequency, the employee’s income, and the claimed withholding allowances to calculate how much federal income tax to withhold.

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