US withholding: federal, state and your W-4

Three separate deductions

A US paycheck usually has three tax layers, and they follow different rules.

Federal income tax is progressive and driven by your W-4. FICA — Social Security and Medicare — is a flat payroll tax, with Social Security stopping above an annual wage cap. State (and sometimes local) tax varies enormously: several states levy no income tax at all, others are progressive, some are flat.

Withholding is only an estimate

Your employer withholds based on the W-4 you filed. If it is out of date — a second job, a working spouse, big freelance income, a new dependant — the estimate drifts. A giant refund means you lent the government money interest-free all year; a bill means you under-withheld and may face a penalty.

When to revisit the W-4

Marriage, a new child, a second job, a large bonus, or moving state. Multiple jobs are the most common cause of under-withholding, because each employer withholds as if its salary were your only income.

The habit

Check once mid-year. Compare year-to-date withholding against a projected annual liability and correct early, while there are still paychecks left to spread the change across.