Understanding Withholding Taxes

The first misconception everyone needs to understand is the money coming out of your paycheck for taxes has basically nothing to do with how much money you owe in taxes.

The money that comes out of your paycheck is only an assumption of how much tax you may owe at the end of the year (more accurately on April 15 the following year).  If too much is taken from your paycheck you get a refund of the difference.  If not enough is taken out you owe the difference.

Now that we’ve gotten that out of the way we can start to break down how tax withholding works.

The tax that comes out of your paycheck is based on something called Form W-4.  There are two main components of this form.  They include “Married” or “Single” and a number referred to as your Allowances.  I’m not going to explain what exactly Allowances mean because, frankly I don’t entirely get it, but it also isn’t necessary to get the point across.

Believe it or not you don’t have to answer the questions on form W-4 in line A through G truthfully.  You also don’t have to check the box for Married or Single based on if you are in fact Married or Single.  Those answers generally can provide a good basis for what to put on the form but are not required.

To simplify, the picture below gives a general rule of how much tax is taken from your paycheck based on how you fill out the form.

Full Disclosure:  I will be the first to admit there are slight inaccuracies in the picture.  The lower numbers of Married actually overlap a bit with the higher numbers of Single.  Also, you can enter more Allowances than 10.  This is only to give a simplified explanation.

Why Is More Tax Taken Out When My Paycheck Is Bigger?

In law enforcement paychecks vary in size based on overtime and various other things we get paid for throughout the year.

Have you ever noticed when you work a ton of overtime you seem to get less of that extra money?

Here’s why.

Since our pay is public record I’m going to use past examples of my own to explain.  I have paychecks with no overtime and others with many hours of overtime. Also, I have changed my W-4 from Single with 0 Allowances to Married with 4 Allowances and various combinations in between.

If you have a paycheck with Taxable Income of $1,889 the assumption is made that all of your paychecks for the year will be this size.  In this case if you had entered Married with 4 Allowances you would have $108 or about 5.7% in Federal taxes taken out of your check.

If you are paid bi-weekly, the assumption is you will make $49,114 ($1,889 X 26 paychecks) of Taxable Income for the year.

Smaller Paycheck

Married with 4 Allowances

Taxable Income $1,889

Assumed Yearly Taxable Income $49,114

Taxes Withheld $108 or 5.7%

Here is what happens if you work a bunch of overtime and have a paycheck with Taxable Income of $2,812.

Larger Paycheck

Married with 4 Allowances

Taxable Income $2,818

Assumed Yearly Taxable Income $73,112

Taxes Withheld $247 or 8.8%

Here are two more examples if you have a small and large paycheck but claim Single with 0 Allowances:

Smaller Paycheck (relatively speaking)

Single with 0 Allowances

Taxable Income $2,359

Assumed Yearly Taxable Income $61,334

Taxes Withheld $403 or 17%


Larger Paycheck

Single with 0 Allowances

Taxable Income $3,068

Assumed Yearly Taxable Income $79,768

Taxes Withheld $581 or 19%

As you can see, even if you claim the same thing, more or less of your paycheck is taken out based on how big or small your paycheck is.

What Is The “Marriage Penalty”?

In my next post, explaining how tax brackets work, I’ll get into this in more detail.  However, as you can see above, less tax is taken out if you claim Married than if you claim Single.

Basically, if you claim Married, the Form W-4 assumes that you are working and your spouse stays home with the kids.  Therefore, if both you and your spouse are working it may be more appropriate to each claim Single to have more tax withheld from your paycheck.

I will add the link here once the Tax Bracket post is written.

What If I Want A Specific Amount Of Money Withheld For Taxes?

You can also add a specific dollar amount to be withheld from your paycheck if you want.  On Form W-4 it is entered on line 6.

How Does A Large Bonus (Or Refund) Affect My Tax Withholding?

Bonuses (or Refunds) are usually paid in a separate check and therefore a standard percent is usually taken out.  This is usually about 25% or so.  As you can see in the examples above 25% was never taken out of even the biggest paycheck.

This is done to protect you from getting a bunch of extra income and being pushed into a higher tax bracket.

If on the other hand you received a bigger paycheck plus a $12,000 bonus combined in one paycheck it could look like this:

Larger Paycheck With $12,000 Bonus

Single With 0 Allowances

Taxable Income $3,068 + $12,000 = $15,068

Assumed Yearly Taxable Income $391,768

Taxes Withheld $4,304 or 28.5%

***IMPORTANT NOTE***

A bonus is not treated any differently by the Federal Government for tax purposes.  If you make $80,000 of Taxable Income in a year and get a $12,000 bonus, it only means you made $92,000 of Taxable Income.  It is treated just like the rest of your income.

In Summary

The main lessons to learn here are:

  1. Just because a bigger percent of your money was taken out of your check for taxes does not mean the income is actually being taxed at a higher tax rate.
  2. You can enter whatever you determine is appropriate on Form W-4 and change it throughout the year.
  3. Large bonuses or payments are not taxed at a higher rate. They generally have more tax withheld to protect you from owing extra taxes at the end of the year.
  4. Stay tuned for an explanation of how Tax Brackets work and why I keep saying “Taxable Income” instead of just “Income”.

If any of this was unclear please let me know so I can try to explain it better.  If you didn’t learn something or if you still have questions, I have more work to do.

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