Basic Tax Math - Part 5 - How Withholding is Calculated

As mentioned in Part 4, the amount withheld for income taxes is based on the data you provide on Form W4 and the state equivalent - if any. How is the actual amount determined from this data?

The withholding "formulas" start with the rate of earnings for each individual paycheck extrapolated to an annual amount. Assume you are paid bi-weekly, which is 26 checks per year. If you make $2K in the biweekly pay period, the withholding formula starts with the assumption that you make $52,000 a year. Based on $52K a year, the formula then calculates the amount of tax that someone who is say "Single with 2 exemptions" (as you note on your W4 form) would be liable for on that amount of annual income. It then divides that amount by 26 to get the amount to be withheld from your paycheck.

If you work overtime, the annual wage base used in the formula is increased and so is the required withholding for that level/rate of income. Conversely, if you work less than full time in a payroll cycle, the withholding will be based on a lower annual rate of earnings as determined by that isolated pay period rather than the amount needed had you worked a full week of wages all year.

With this in mind, you can imagine what happens when a taxpayer works multiple jobs with different rates and hours. Working a part-time job results in less withholding by percentages on those paychecks than a job with full-time hours. Since your tax is based on an annual "pot" of earnings, all of the withholding must aim for the withholding that will cover total wages for the year. It may be necessary to request withholding at the "single" rate despite the fact that you may be married. The W4 form doesn't declare your marital status, it just allows you to set your withholding at a higher rate by using exemptions, a different filing status, and specified additional amounts with each check.