Federal withholding tax is the specific amount of an employee's pay that the employer sends to the federal tax authority. This amount serves as a partial payment for the tax liability the employee is required to pay to the federal government. The amount that is sent or withheld is determined by a number of allowances found on an employee's W-4 form.

Taxable Income

In order to determine your taxable income, the federal tax authority uses your gross pay from your job. Gross pay includes everything from salary, commissions and even tips you earn from your job. Next, your allowances (as stated on your W-4 form) are taken into consideration and your taxable income is determined.

History

Federal withholding tax was created by the U.S. government as a way to make the collection of taxes by the government easier. However, many people argue that enacting the withholding tax made U.S. government taxation less transparent for citizens and harder to keep track of.

Allowances

Some of the criteria used to determine your allowances include things such as marital status, whether or not you are a dependent or can claim a dependent, age and any disabilities you have.

Exemptions

If you did not have any tax liability the previous year, you are automatically exempt from withholding. Furthermore, if your annual income is less than $950, you are eligible for exemption.

Other Income

If you have a second means of income that is not covered by your wages, your tax liability will increase. As a result, you may opt to withhold more of your wages/salary in order to compensate for this increased liability.

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