Withholding Allowance

Withholding allowance refers to an exemption that reduces how much income tax an employer deducts from an employee’s paycheck. In practice, employees in the United States use Internal Revenue Service (IRS) Form W-4, Employee’s Withholding Allowance Certificate to calculate and claim their withholding allowance. The employer then uses the W-4 information to determine how much of an employee’s pay to subtract from their paycheck to remit to the tax authorities. The total number of allowances you are claiming is important—the more tax allowances you claim, the less income tax will be withheld from a paycheck; the fewer allowances you claim, the more tax will be withheld.