A withholding allowance is an exemption that reduces how much income tax an employer deducts from an employee’s paycheck. The amount of withholding is based on a taxpayer’s filing status (single or married but filing separately, married and filing jointly, or head of household) and the number of withholding allowances they claim. The more allowances an employee claims, the less income tax will be withheld from their paycheck, and vice versa. Employees determine their withholding allowances using IRS Form W-4. The number of allowances an employee claims depends on their tax strategy and whether they need to take more tax out of their check or they need more monthly income.

It is important to note that individuals need to file a new Form W-4 whenever their personal or financial situation changes. For example, if an employee has a milestone event such as a new baby, marriage, or employer, it is a smart idea to revisit the withholdings on their W-4. An individual can be exempt from a withholding allowance, but it’s not easy to receive that status. You can claim the withholding exemption only if you had a right to a refund of all federal income tax withheld in the prior year because you didn’t have any tax liability and you expect the same for the current year. You simply write “Exempt” on Form W-4. This must be done annually; the exemption doesn’t automatically carry over.

Employers must withhold taxes from employees’ paychecks, and the amount of withholding depends on the number of allowances claimed by the employee. An employee can request additional withholding if they want to ensure that enough tax is being withheld from their paycheck.