What Is Income Tax Withholding and Why You Want To Get It Right

tax forms with a mouse and a mug

I’ve heard a few questions recently about how to calculate the number of exemptions you list on your federal income tax withholding. Withholding sounds complicated but it really isn’t.

What is withholding and why do you care?

Withholding is the amount of taxes that are taken out of your paycheck every pay. This amount builds up, basically like a savings account, and when you calculate your taxes at the end of the year, the amount of your withholding is applied to the amount that is due. If you withhold too much, you will get a tax refund. If you didn’t withhold enough, then you will owe additional taxes.

How does the finance department know how much to withhold?

The finance department uses your Form W-4, Employee’s Withholding Allowance Certificate, to figure how much they should hold out for taxes.  You use the W-4 to give instructions on how to calculate the amount withheld.  The accuracy of your withholding is based upon what you put on the W-4 form and so the information on the W-4 helps to control whether you get a tax refund or if you additional taxes when you calculate your return.

How you you know what to put on your W-4?

First, you can use the IRS Withholding Calculator.  This calculator asks a series of questions and estimates what you should probably put on your W-4 form.   If you are confused, this calculator is a great place to start.  Using the results from the withholding calculator to fill out your W-4 will most likely result in getting close to the right amount of tax withheld.

Issues that will impact your withholding include:

  • entering or leaving a tax-free combat zone
  • beginning or ending a second (or third!) job
  • getting married
  • having a baby
  • buying or selling a house
  • moving out of a house that you own

Fortunately, DFAS figures out the combat zone part, and the calculator takes the other factors into account.  One important thing, though, is that you need to change your W-4 whenever any of these things happen.  (Except for the combat zone part.)  Fortunately, MyPay makes changing withholding easy!

How do I change my W-4?

Changing your federal withholding is so simple, and you can do it as often as necessary.  Log into your MyPay account and click on the Federal Withholding link.  A long page will come up, explaining withholding, and at the bottom there is a form that looks like this:

Click on the image to see it larger

Fill in the appropriate blanks, hit Save, and you’ve done it.  The effective date of changes will be listed on the screen once your changes have been saved.

What if I’m not in the military, need to change my withholding for a second job, or my spouse needs to change his or her withholding?

As your manager or human resources department for a new W-4 form, complete it, and turn it in to the right person.  Check on your next paycheck to be sure that the changes have been made.

Keeping your W-4 up to date will mean fewer surprises when you file your income tax return.  It should only take a few minute to do, and you can update it regularly without a lot of fuss.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • steve

    I see articles that only allow “share” when I woud like to e-mail instead of the limitation of share and all that includes. Why not have e-mail this article as a choice? I mean without the additional avenues posted????
    Steve, Retired

  • Phil

    I’d like some info on the tax and tax schedule that should be used when you have a lump sum.
    This lump sum is 9 months back wages total.
    The way my employer wants to do it is in an bi-monthly payment which throws me into a much higher tax bracket and higher fed & state(CA) taxes.
    Is this the correct way or only way?

  • Patrick

    On MyPay I had too much taken out for withholding tax how do I put the
    correct amount in…..there is a box for an additional amount to be
    taken out but nothing for decreasing it?

    • KateKashman

      Patrick, you will have to adjust your withholding by changing the number of allowances that you claim. I believe that the most you can claim via MyPay is 10, though you are legally allowed to claim more in order to reduce your withholding to 0. This might be a trial and error sort of thing until you get your withholding to the right level for your situation. If you need to claim more than the 10 allowed on MyPay, you can do it through your finance office. My husband had to do this for several years when we had lower income and a large mortgage payment equaling itemized deductions.

      Hope that helps!

  • Brian Schwarm

    If i changed my federal withholding in february and it said it would be effective in march but when I go to check again it says it will be effective to my pay in april, does that mean I will get back pay?

    • Kate

      When you complete your 2014 tax return next year, whatever amount you have had withheld that exceeds your tax liability will be returned to you as your tax return. Is that what you are asking?