Understanding Your Tax Withholdings

Honestly, understanding taxes isn’t as easy as it seems. You have taxes taken out of your paycheck. You may (or may not) pay taxes on items you purchase. You file your annual tax return with the IRS. If you have a business, you may even file quarterly taxes with the IRS. There is a lot that goes into understanding your tax withholdings, understanding what is the right amount to pay in taxes, and how taxes can impact you.

While I would need to write multiple articles to help you understand everything there is to know about taxes, I want to focus on tax withholdings. Tax withholdings are the taxes that come out of your actual paycheck. If you have too much taken out each pay period, you are essentially “loaning” money to the IRS, which is then paid back after filing your tax return (and without interest). If you have too little taxes taken out each pay period, you are underpaying the IRS and will likely have to pay it back when you file your tax return.

I want to help you avoid either situation. It should almost be a wash, come tax return filing time. You didn’t pay too much and you didn’t pay too little taxes during the year. It all starts with understanding your tax withholdings and making sure you have the right number of deductions taken out.

What are tax withholdings?

First and foremost, to be a working citizen of the United States, you are required to pay taxes. That’s just the lay of the land. The taxes that come out of your paycheck are income taxes, Social Security and Medicare taxes, and any state or local taxes that may apply to where you live. For the sake of this article, we will focus on the income taxes (probably noted as Federal Withholding on your paycheck).

The Federal Withholding taxes are required to be paid by the person earning the income. The IRS imposes this tax to help ensure people don’t avoid paying their taxes. The taxes that come out of each paycheck are advance payments made on behalf of your overall tax liability. If you didn’t not pay income taxes throughout the year, you will have a juicy tax bill come filing time.

How many tax withholdings (allowances) should you claim?

Now that you know you must pay taxes if you are working in the United States, how do you ensure that you aren’t over or underpaying on taxes throughout the year? It’s not quite a perfect science, because certain things can impact the total amount you owe when you file your tax return. Things like tax credits and deductions save you some money.  When determining your tax withholdings, I would try not to think about the tax credits and deductions that you will apply when you file. It’s better to be safe than sorry.

There are certain guidelines that dictate claiming an allowance. When you complete your W-4 form when starting a new job, or changing your previous allowance selections, there is a worksheet that helps you determine a valid number of allowances to claim. This worksheet is derived directly from the IRS and can be a little difficult to understand.

When determining the number of tax allowances you’ll have to claim, your filing status, the number of jobs you have and whether you have people who rely on you (dependents) will come into play. One thing to note is that unless someone else claims you on their tax returns (most likely your parents), you will always claim yourself. This automatically means “1” allowance. If someone else claims you, you will not claim yourself.

If you are a single person, with no children and one job (and no one else claims you), you would essentially claim “2” allowances. You would claim yourself and the claim that you are single with one job.

If you are a single person, with 2 children and one job, you would claim “4” allowances. You would claim yourself, the two children who depend on you, and the “Head of Household” filing status. Essentially, you are the breadwinner. You are the head of household in charge of covering everyone’s cost of living.

If you are a married person, you and your spouse would need to determine if you are filing together or separately come tax time. How you file could impact the number of allowances you both claim, especially if children are in the mix. Both parents cannot claim the same child, unless they are filing their tax return together, as a married couple.

Should you claim exempt from tax withholdings?

There are certain scenarios that would make a person exempt from tax withholdings. If you are working, it’s very rare that you could be tax exempt. You may be tax exempt if you owed zero taxes in the previous tax year and received a refund for the federal income tax that was withheld. You may also be exempt from tax withholding if you believe you have no tax liability for the current tax year.

Related: 6 Things to Do Now for Next Year’s Tax Return


The IRS doesn’t want you to overpay or underpay taxes during the year, and neither do I! If you need additional guidance on determining your tax withholdings, check out the IRS Tax Withholding Calculator. What experience do you have with tax withholdings? Have you ever claimed too many or too little allowances? Hopefully now you know you can at least claim yourself!

The CGS Team



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