What Is Withholding Tax? How It Works and How To Avoid Owing at Tax Time

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Ever look at your paycheck and wonder why the amount you actually take home is a lot less than you’ve earned? That’s where withholding tax comes in.  

Withholding tax is money your employer sends directly to the IRS to cover your federal income tax and other taxes, like Social Security and Medicare. It helps ensure you’re paying your taxes throughout the year instead of all at once come tax time. 

Getting your withholding right can help you avoid an unexpected tax bill — and even boost your refund. 

What Is Withholding Tax?

Withholding tax is the portion of your paycheck that your employer holds back and sends to the IRS. It covers your federal tax withholding and helps pay your share of federal taxes in real-time.  

In 2022 alone, employers withheld over $2.7 trillion in federal income tax from U.S. workers. 

Withholding Tax vs. Income Tax: What’s the Difference?

Think of withholding tax as prepaying your income tax. While income tax is the total amount you owe yearly, withholding tax is the money set aside from each paycheck to cover that bill. 

How Withholding Tax Works

When you start a job — or if your situation changes — you fill out IRS Form W-4. This form helps your employer calculate how much to withhold.  

Get it right, and you’ll pay the right amount of tax throughout the year. Get it wrong, and you could end up owing the IRS — or giving them an interest-free loan. 

The Role of IRS Form W-4

Your W-4 is the tool that controls how much money is withheld from each paycheck. Update it if you get married, have a child or change jobs. The IRS recommends checking your withholding at least once a year. 

What Happens If You Withhold Too Much or Too Little?

• Too much withheld? You’ll likely get a tax refund — but remember, the IRS issued over 96 million refunds in 2023, with the average refund at around $3,000. That’s your money coming back. 

• Too little withheld? You could owe the IRS when you file your tax return and you might even face underpayment penalties. 

Types of Tax Withholdings

Here’s a quick look at what could be coming out of your paycheck: 

Withholding for Self-Employed Workers

If you’re self-employed, no one’s taking taxes out of your paycheck for you. Instead, you make estimated tax payments — usually four times a year.

Estimated Tax Payments

These payments cover your share of federal taxes, Social Security and Medicare. According to the IRS, over 10 million taxpayers make estimated tax payments each year. 

EFTPS Overview 

You can pay your taxes online using the IRS’s EFTPS. It’s a secure, free service from the IRS. 

Can You Be Exempt From Withholding?

Some workers can claim exemption from withholding if they had no tax liability last year and expect none this year. You’ll need to file a new W-4 each year to keep your exempt status. 

How To Calculate Your Withholding Tax

The best way to check if you’re withholding the right amount? Use the IRS Withholding Estimator. 

What You’ll Need to Use the Tool:

• Your latest pay stubs 

• Last year’s tax return 

• Estimates of other income and deductions 

Understanding Federal Tax Brackets (2025)

Federal tax brackets determine how much tax you pay on different parts of your income. For example: 

• 10% on the first $11,600 for single filers 

• 12% on income from $11,601 to $47,150 

• 22% on income from $47,151 to $100,525 

Knowing where you fall can help you make smart adjustments to your withholding. 

How To Maximize Your Tax Refund 

Adjust Your Withholding 

If you consistently get a big refund or end up owing, update your W-4 to better match your actual tax situation. 

Claim All Eligible Deductions

Lower your taxable income by claiming deductions for things like student loan interest, mortgage interest and retirement contributions. 

Final Take to GO: Why Withholding Tax Matters

Withholding tax is how you pay federal taxes as you earn your income. It keeps you on track so you’re not hit with a big tax bill — or a big refund that could have been in your paycheck all year.  

Check your W-4, use the IRS Estimator and stay ahead of your taxes to keep more of your hard-earned money in your pocket. 

For more tips, check out our guides on how to file your taxes online and common tax deductions you might be missing. And if you’re unsure about your tax situation, it’s always smart to check with a tax pro. 

Quinlan Grim contributed to the reporting of this article.

Information is accurate as of June 3, 2025.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

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