What is a withholding allowance? Is it equivalent to a personal exemption?
I don’t want to know how to calculate my withholding. There are 8 million websites that can help me with that but none that go into the technical detail of this specific question.
I want to know why the numbers don’t add up if I take my gross income, subtract pretax benefit payments and 401(k), subtract the standard deduction for a married person, subtract my current number of allowances times the personal exemption for 2009, and then use the standard tax brackets to determine my expected federal income tax for the year. When I divide that by 26 paychecks, I am about $9 off from what is currently being withheld. Am I missing something, or is the withholding allowance some sort of handwaving IRS shit that I need to dig deeper on?
What Does It Mean?
What Does Withholding Allowance Mean?
An allowance an individual claims on a W-4 Form. It is mainly used to assist an employer in calculating the amount of income tax to withhold from an employee’s paycheck.
Investopedia explains Withholding Allowance
The more allowances you wish to claim, the less income tax will be withheld from your paycheck. You can claim one allowance for yourself, one for your spouse, and one for each of your dependents.
I’m not sure why yours is off. Perhaps that is best taken up with your payroll department and checking your W-4 form. I can tell you though you would rather have an allowance too low (meaning overtaxed) than too high (meaning undertaxed) because besides the difference between a payment and a refund at the end of the year, if you go too far under there are penalties that apply.
It is mainly used to assist an employer in calculating the amount of income tax to withhold from an employee’s paycheck.
Okay, so it sounds like it doesn’t directly map to anything specific. I’m close enough, but I was just curious.
Some ask their payroll to withhold as little as possible as they plan to invest the difference in savings and then pay their taxes out of that. The IRS only allows you to do that for up to (IIRC) 25%. In other words, the difference between what they withhold and what you owe can’t be more than 25% of your taxes from income. Also, imo, at today’s savings rates, it’s not worth the hassle.
My wife is working now so I need to adjust it waaaay in the other direction. We didn’t know when she would start so I didn’t bother to update my 2009 withholding earlier in the year. I’ll actually have to pay an additional couple hundred bucks per paycheck to catch up, but I don’t mind (from a personal finance standpoint) and am aware of the issues other than the technical detail of finding out what a withholding allowance is so I can make more accurate calculations.