W-4 & Tax Withholding Glossary

Allowances (Old W-4 System)

The pre-2020 system of claiming exemptions on a W-4 to reduce withholding — no longer used.

Adjusted Gross Income (AGI)

Your total income minus above-the-line deductions — the number used to calculate many tax phaseouts.

Additional Medicare Tax

An extra 0.9% Medicare tax on wages above $200,000 (single) or $250,000 (married filing jointly).

Above-the-Line Deduction

A deduction taken from gross income to arrive at AGI — available whether or not you itemize.

Balance Due

The amount you owe the IRS when your withholding was less than your actual tax liability.

Child Tax Credit

A $2,200 tax credit per qualifying child under 17 — claimed in W-4 Step 3 to reduce withholding.

Deductions Worksheet

The IRS worksheet for calculating the Step 4b entry — used when itemizing deductions on your tax return.

Dependent

A qualifying person (usually a child or relative) you support — claimed on your W-4 to reduce withholding.

Effective Tax Rate

The average rate you pay across all your income — always lower than your marginal rate.

Exempt from Withholding

A status claiming zero federal income tax withholding — available only if you had no tax liability last year and expect none this year.

Filing Status

Your tax category based on marital and household situation — determines your tax brackets and standard deduction.

FICA

The combined Social Security and Medicare payroll taxes — 7.65% of wages for most employees.

Federal Income Tax

The progressive income tax the U.S. federal government levies on wages and other income.

Head of Household

A favorable filing status for unmarried taxpayers who pay more than half the household costs for a qualifying person.

Itemized Deductions

Specific deductible expenses you list on Schedule A instead of taking the standard deduction.

IRS Publication 15-T

The official IRS document containing the federal income tax withholding tables employers use.

Medicare Tax

The 1.45% payroll tax withheld from all wages to fund Medicare — no wage cap.

Marginal Tax Rate

The tax rate that applies to the last (highest) dollar of your income — your 'tax bracket.'

Multiple Jobs Worksheet

The IRS worksheet (in W-4 instructions) for calculating accurate withholding when you have more than one job.

Married Filing Jointly (MFJ)

The most common filing status for married couples — combining incomes on one return for wider brackets and larger deductions.

Married Filing Separately (MFS)

A filing status where married spouses file independent returns — usually results in higher combined taxes.

OBBBA Deductions

New 2026 above-the-line deductions created by the One Big Beautiful Bill Act — for tips, overtime, seniors, and auto loans.

Overtime Exclusion

An OBBBA 2026 provision excluding up to $12,500 of overtime pay from federal income tax.

Percentage Method

The formula-based IRS withholding calculation method — used by most computerized payroll systems.

Standard Deduction

A flat dollar amount that reduces your taxable income — most taxpayers take this instead of itemizing.

Social Security Tax

The 6.2% payroll tax withheld on wages up to the annual wage base to fund Social Security benefits.

Safe Harbor Rule

An IRS rule that protects you from underpayment penalties if your withholding meets either of two minimum thresholds.

Step 4c — Extra Withholding

A line on the W-4 where you specify a flat dollar amount to withhold from every paycheck in addition to the calculated amount.

SALT Deduction

The deduction for state and local taxes paid — capped at $40,000 under OBBBA 2026, up from $10,000.

Taxable Income

The portion of your income subject to federal income tax after all deductions are applied.

Tax Bracket

An income range taxed at a specific rate — income in each bracket is only taxed at that bracket's rate.

Tax Refund

Money the IRS returns to you when your withholding exceeds your actual tax liability for the year.

Tip Income Exclusion

An OBBBA 2026 provision excluding up to $25,000 of tip income from federal income tax.

Underpayment Penalty

An IRS penalty charged when you owe more than $1,000 and your withholding falls below safe harbor thresholds.

Withholding

Taxes taken out of each paycheck before you receive it.

W-4 Form

The IRS form employees submit to their employer to control how much federal tax is withheld.

W-2 Form

The annual wage and tax statement your employer sends you and the IRS after year-end.

Wage Bracket Method

The IRS lookup-table approach to calculating withholding — an alternative to the Percentage Method.