Withholding allowances used to be a way employees could adjust how much money employers take out of their paychecks for federal income tax. Although the IRS removed withholding allowances for federal income tax in 2020, they’re still out there—through pre-2020 W-4 forms and state income tax.
So, what is withholding allowance? What happens if an employee needs to adjust their tax withholding allowances? Which states still use this method for calculating state income tax withholding?
What is a withholding allowance?
An allowance is a withholding tax exemption from income tax. The more allowances an employee claims, the less income tax you withhold from their wages, and vice versa. Employees can claim withholding allowances on certain state W-4 forms.
States vary on what employees can claim allowances for. Generally, employees may claim allowances for:
- Themselves
- Their spouse
- Dependents
The more situations on the worksheets that apply to the employee, the more allowances they can claim. An employee’s total number of allowances determines how much tax you withhold.
States may have additional circumstances that qualify an employee for additional allowances. For example, California includes blindness in their regular withholding allowances.
Prior to 2020, employees could also claim allowances on Form W-4, Employee’s Withholding Allowance Certificate. But in 2020, the IRS removed allowances and released the new W-4 form, Employee’s Withholding Certificate.
Some of your employees may still have 2019 and older federal W-4s on file. Employees are not required to fill out a new, allowance-free W-4 unless they are a new hire whose first paycheck is in 2020 or later or an existing employee who wants to change their withholdings.
Recap: You may use allowances for state income tax withholding, depending on the state. And, you may use allowances for federal income tax withholding, depending on the version of the W-4 you have on file for each employee.
What replaced W-4 allowances?
Federal withholding allowance may be a thing of the past. But, employees are still able to adjust their withholdings on Form W-4.
Instead of allowances, employees can determine the amount of federal income tax they want you to withhold by:
- Claiming dependents on W-4
- Reporting multiple jobs or a working spouse
- Using the deductions worksheet
- Requesting employers withhold more in taxes
Keep in mind that an employee can claim “Exempt” from federal income tax on Form W-4, if applicable.
Which states still use tax withholding allowances?
Although the IRS got rid of allowances for federal withholding, a number of states use them for state income tax.
States that base state income taxes on allowances include:
- California
- Colorado
- D.C.
- Georgia
- Hawaii
- Idaho
- Illinois
- Iowa
- Kansas
- Maine
- Minnesota
- Montana
- Nebraska
- New Jersey
- New York
- North Carolina
- Oklahoma
- Rhode Island
- South Carolina
- Vermont
Can employees adjust their number of allowances?
Yes, employees can adjust their tax allowance claims on their state W-4 form. In fact, they can do it at any time throughout the year. Here are some reasons someone might change their withholding allowances:
- Marriage or divorce
- Birth or adoption of a child
- Starting a second job
- Spouse has employment change
- Decision to itemize deductions
- Too much or too little is being withheld
The same is true for federal income tax and states that don’t use allowances—employees can change their withholding amounts (not allowances) at any time.
But here’s the catch: An employee whose federal income tax is based on allowances (because they have a 2019 or earlier W-4 on file) cannot adjust their allowances. If they want to change their withholding, they need to submit a new Form W-4 to you. A new W-4 that doesn’t use allowances.
So yes, employees can adjust their withholdings. But when it comes to the federal W-4, employees with pre-2020 W-4s must swap allowances with adjustments, dependents, and deductions.
Reminder! If you received a lock-in letter from the IRS for an employee, the employee cannot decrease their withholdings on Form W-4.
What you need to do when an employee adjusts their withholding
If an employee wants to change their withholding, they need to submit a new federal Form W-4 to you.
When you receive a new Form W-4: The form goes into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received the new Form W-4.
How much do I withhold from employee wages?
You won’t withhold the same amount of federal and state income taxes from each employee’s wages. How much you withhold depends on the employee’s earnings; filing status; and allowances or adjustments, dependents, and deductions claimed.
Use income tax withholding tables to calculate how much federal income tax to deduct from employee wages. You can find these in IRS Publication 15-T. Or, you can use payroll software for automatic calculations.
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This article has been updated from its original publication date of September 26, 2016.
This is not intended as legal advice; for more information, please click here.