Tax Withholding

US income tax is pay-as-you-go: tax is due as income is earned, not only in April, and withholding is how most people meet that obligation without thinking about it. Your employer uses the Form W-4 you filed and the IRS withholding tables to work out federal income tax on each paycheck, and in most states it withholds state income tax too. Only taxable income is withheld on, so non-taxable income such as gifts, child support or life insurance proceeds has nothing withheld.

Income tax withholding is a forecast. The employer sees one job and one pay period, not your whole return, so it can’t know about a spouse’s salary, a side business, investment income or the tax credits you will claim. If withholding for the year exceeds your actual tax, you get the difference back as a refund. If it falls short, you owe the rest when you file.

Social Security and Medicare tax withholding is different, because it is the tax itself: a fixed 7.65% of the earned income you receive as wages, with little to reconcile. Two exceptions are settled on your return: the 0.9% Additional Medicare Tax, which employers start withholding once wages pass $200,000 whatever your filing status, and excess Social Security tax when two employers together withheld on more than the $184,500 wage base for 2026.

Form W-4 no longer uses allowances. The 2026 version has five steps: personal information and filing status; an adjustment if you hold more than one job or your spouse works; the child tax credit and other credits, at $2,200 per child under 17 and $500 per other dependent; other adjustments; and your signature. Step 2 matters more than it looks. Without it, each employer withholds as if its paycheck were the household’s only income, so two salaries both start at the bottom of the brackets and the couple under-withholds.

Step 4 is where most fine-tuning happens. Line 4(a) adds income that has no withholding, such as interest, dividends or retirement income. Line 4(b) subtracts deductions beyond the standard deduction, which for 2026 includes the new deductions for tips, overtime, car-loan interest and seniors. Line 4(c) adds a flat extra amount to every paycheck.

If you never give your employer a W-4, it must withhold as if you were single or married filing separately with no other entries. You can claim exemption from withholding only if you had no federal income tax liability last year and expect none this year, and the exemption lasts one year. The IRS Tax Withholding Estimator does the arithmetic, and the form recommends it if you start a job midyear, have two jobs, or receive bonuses, dividends, capital gains or self-employment income.

A bonus or other supplemental pay can be withheld at a flat 22% in 2026, which leaves a shortfall for anyone in the 24% bracket or above; vesting RSUs are a frequent culprit. Supplemental pay above $1 million in a year must be withheld at 37%.

Retirees have to assemble their own withholding from several payers, each with its own default, shown in the table below. Nothing is withheld from Social Security unless you file Form W-4V, and nothing at all from interest, dividends or capital gains. A traditional IRA withdrawal gets only 10% unless you choose another rate, even when it lands in the 22% or 24% bracket. A 401(k) distribution that could have been rolled over but is paid to you instead has 20% withheld, and you can’t choose less. Required minimum distributions don’t count as eligible rollover distributions, so that 20% floor doesn’t apply to them.

The usual ways to fill the gap are extra withholding from a pension or Social Security, or quarterly estimated tax payments. Late in the year, extra withholding usually beats an estimated payment, for a reason explained below.

A balance due isn’t a penalty, as long as you paid enough along the way. The IRS charges an underpayment penalty only if withholding plus estimated payments fell short of the smaller of 90% of this year’s tax or 100% of last year’s, or 110% of last year’s if your prior-year AGI topped $150,000 ($75,000 married filing separately). If what you owe after withholding and refundable credits is under $1,000, there is no penalty at all.

Withholding has one big advantage over estimated payments. An estimated payment counts on the date you make it, but withholding is treated as paid in four equal parts on the quarterly due dates, however late in the year it actually happened, unless you choose to show the real dates. So someone who discovers a shortfall in November can raise withholding on their last paychecks, or take a withheld IRA distribution in December, and cover the whole year after the fact. The same money sent as a January estimated payment would leave the earlier quarters underpaid.