How to Calculate Your Federal Income Tax Withholding

Have you ever wondered how your employer calculates your federal income tax withholding on your paycheck? The calculation’s not that hard to figure out if you have the right information. You can use an online withholding calculator from the IRS (NOTE: the IRS calculator does not reflect 2011 changes) or you can run the numbers yourself, which I’m going to cover here.

To perform the calculation yourself, you’ll need the following information:

• W-4, which shows your exemptions. You might have to call your Human Resources Department to get this information. It’s not a bad idea to update your W-4 annually. Remember, the more exemptions you take, the less that will be withheld from your paycheck each period. Your goal should be to get the amount withheld as close to the amount that you will owe when your taxes are due.

• Your pay rate, frequency, 401(K) contribution amount, health insurance, dental insurance, flexible spending account contributions, and any other before-tax contributions.

IRS Publication 15 (mainly page 35 and the tables that follow).

The first step is to determine the value of your withholding allowances. You’ll first need to know the number of allowances you are claiming. Once you know that number, you’ll need to look at the chart on page 35 of Publcation 15 to find the value of each withholding allowance, based on your pay frequency.

So, if you are married, have four exemptions and you get paid semi-monthly (24 times a year), your allowances are worth $154.17 each or a total of $616.68.

Let’s say you make $6,000 per month ($3,000 per pay period). You contribute 10% to your 401(K), pay health insurance premiums of $300 per month, dental insurance premiums of $100 per month, and you contribute $100 per month to your flexible spending account. All of your pre-tax deductions amount to $1,100 per month or $550 per pay period.

Now to calculate your withholding per pay period, simply take your $3,000 in earnings and subtract your $616.68 in allowances and your $550 in pre-tax deductions, giving you a taxable amount of $1,833.32. You then look up the withholding amount, using Table 3(b) on page 36 of Publication 15, which looks like this:

You can see that we need to look at the second line down. Our taxable income is $1,833.32, so our withholding tax is $70.90 plus 15% of the amount over $1,038. The difference between $1,833.32 and $1,038 is $795.32. Our withholding tax on that $795.32 is $119.30 for a total withholding tax of $190.20.

The cool thing about being able to figure this out on your own is that you can run different scenarios to see how your 401(K) contribution amount affects your take-home pay. We’ll look at that next.

9 thoughts on “How to Calculate Your Federal Income Tax Withholding”

  1. We may not be able to itemize our deductions for 2011 (depends on when our condo sells and thus and how much the pro-rated mortgage interest and property tax deductions are). We are both taking 0 exemptions this year and still are looking at a possible $6000+ shortfall. Does this happen a lot? We’re upper-middle class, but I don’t think we make THAT much money (2010 will be our first year in the 25% marginal bracket). I know there’s an option to specify an additional dollar amount to be withheld from each paycheck, but we’ve elected to make quarterly payments instead (we’ve had to do it the last two years anyways). We were just surprised.

  2. You could make estimated tax pmts to your state if you’re close to being able to itemize…you’ll then get it back next year (but will have to add it to taxable income on the Line 10 Gov’t refund line…) Bunching your charitable contributions could also help.

    OR just save the cash flow and take the itemized deduction 🙂

  3. C, do you have income from Sch C (thus would also generate self-employment taxes) or lots of capital gains or taxable interest/dividends? You shouldn’t have that much of a tax balance due, so I’m curious…

  4. Stacey – Nope, no schedule C income and only about $700 in dividends (most should be qualified this year). I’ve done our taxes every year since 2005 and this is the third year I’ve done the estimated taxes worksheet (I had income from a fellowship in 2009 and 2010) so I’m pretty confident in my ability to figure the numbers our correctly.

    The overall tax bill seems about right (a little less than 15%), it was just the huge shortfall that was a small shock – and the possibility for a huge under-withholding penalty if we hadn’t done the math. The only reason I could come up with, after mulling it over a bit more, is that my income and my husband’s are fairly close (less than $8000 difference)? Though we’d both individually be in the 25% bracket as single filers or MFS.

  5. I don’t use these tables. I use what the IRS says the income tax brackets are. Then estimate cash flows, add some fat, take out 401k/health insurance deductions that then gives tax income.

    Once you know tax income, estimate next years tax bill, then subtract our how much is being paid in.

    Are you sure you aren’t hitting AMT? Something isn’t adding up. My 2 cents…

  6. No AMT. I’m willing to throw details out here because I really want to know the answer to this.

    My Paycheck: $2808 every two weeks. $168 in 401K contributions. Taxable income of $2640, or $68,640 per year. 0 exemptions = $296 in federal withholding per paycheck, or $7696 per year (according to the table JLP posted it should calculate to $311; I think this small discrepancy is due to not having the ‘Making Work Pay’ credit adjusted on my paycheck yet).

    Hub’s paycheck: $3359 twice a month. $347 in 401K contributions, insurance and FSA. Taxable income of $3012, or $72,288 per year. 0 exemptions = $367 in federal withholding per paycheck, or $8808 per year (this is what the table calculates).

    So we have a total taxable income of $140,928. Less two personal exemptions and the standard deduction for 2011, we’re left with $121,828. This puts us squarely within the 25% tax bracket for MFJ, but on the table above we’re both under the $3204 per-paycheck cutoff for withholding above 15%.

    Tax on an AGI of $121,828 = $1700 (10% bracket) + $7800 (15% bracket) + $13,207 (25% bracket) for a total tax bill of $22,707. But we are only having $16,504 withheld.

  7. Courtney – it looks about right. Using the W-4 worksheet ( I get an additional annual withholding of $6510 — i.e., zero allowances plus withholding $6510 for the year. The key is to use the “Two-Earners/Multiple Jobs Worksheet” at the bottom. This threw me off when we first got married — I missed the extra section and assumed putting down zero allowances for both of us would be more than enough. It was a sad day when instead of the expected refund we had a large chunk due (not $6000, but shocking enough at the time).

    The problem is that even if you withhold with zero allowances, each of your employers has no knowledge of the other income, so the withholding for each of you is done starting with the lowest bracket. You can think about it as your entire income being taxed at 25% since your husband’s already completes the 10% and 15% brackets (or vice versa if you want to start with your income and add his). But your witholding is done starting at the 10% bracket.

  8. To add – I’m single, but I have a similar issue with having three jobs. It’s difficult to manage my withholdings, because my side job, where I make $2500, assumes that’s my only income, and only about $100 gets taken out. Even though most of that money is in the 15% bracket, and I’d owe $375 on it.

  9. Jonathan – Ah ha! I have not heard of this “Two-Earners/Multiple Jobs Worksheet” of which you speak. I wonder why they don’t just withhold everyone at the single rate and let them adjust with additional allowances if it’s too much? Seems like that would solve at least some of the problems. I always just did the math myself to figure out if it was enough or not. That stinks that you got burned by it at tax time though :-/

Comments are closed.