Tax Withholding

Tax withholding is the system where your employer takes taxes out of every paycheck and sends them to the IRS and state tax agencies throughout the year. It's a pay-as-you-go system designed to prevent a massive tax bill on April 15.

What Gets Withheld:

Federal Income Tax:

• Based on W-4 form (filing status, dependents)
• Progressive rates: 10%, 12%, 22%, 24%, 32%, 35%, 37%
• Most workers: 12% or 22% marginal bracket

State Income Tax:

• 0-13% depending on state
• Some states (TX, FL, WA, NV, etc.) have no state income tax
• Based on state W-4 or equivalent

FICA Taxes (separate from withholding):

• Social Security: 6.2%
• Medicare: 1.45%
• These are FIXED, not based on W-4

Real Paycheck Example:

$75,000 salary, single, no dependents:

Gross biweekly pay: $2,884.62

Federal withholding: ~$360 (12.5%) State (CA): ~$140 (4.8%) Social Security: $178.85 (6.2%) Medicare: $41.83 (1.45%)

Total taxes: $720.68 (25%) Net pay: $2,163.94

Common Withholding Scenarios:

Under-Withholding (Owe at Tax Time):

• W-4 claimed too many dependents
• Side income not covered by withholding
• Result: Owe $500-5,000+ on April 15

Over-Withholding (Big Refund):

• W-4 too conservative
• Extra withholding requested
• Result: Refund $2,000-8,000+
• Downside: Interest-free loan to government all year

Optimal Withholding:

• Refund: $0-500 (no overpay, no underpay)
• Owe: $0-100 (keeps your money working for you)

When to Update Your W-4:

• ✅ Got married or divorced
• ✅ Had a baby or dependent
• ✅ Bought a house
• ✅ Spouse started or stopped working
• ✅ Big raise or promotion
• ✅ Started side hustle

The Bottom Line: Withholding is your paycheck's tax bill paid in installments. The goal is balance: not too much (interest-free loan to IRS), not too little (penalty and April panic). Update your W-4 after major life changes.