Calculating Withholding Tax

Once the employer has the information you’ve entered on forms W-4 and W-4VT, the employer is able to calculate your withholding tax. To help employers calculate and withhold the right amount of tax, the IRS and the Vermont Department of Taxes issues guides each year that include withholding charts and tables. When you receive your pay—either by direct deposit or paper check—your employer has already deducted federal and state income taxes, as well as payroll taxes such as Social Security and Medicare.

Federal Income Tax Withholding: Form W-4

It is important to complete Form W-4 accurately so your employer withholds the right amount of tax from each paycheck. The income tax your employer collects, and pays is a percentage of your income based on your filing status and other information you give to your employer on Form W-4.

Withholding tax is really an estimate of tax you owe, and you won’t know for sure how much you owe until you file your tax return. If too much tax is withheld, you will get a tax refund, but then you won’t have as much money in your paycheck to pay your expenses. On the other hand, if too little is withheld, you will owe tax, and that may be money you do not have readily available at the time you file.

Finding the perfect balance may take a bit of trial and error, especially as your filing status and number of allowances may change from year to year. Try the IRS Tax Withholding Estimator to help you figure out the right amount of tax to withhold.

We recommend you learn about Form W-4 before completing and submitting it to your employer. The instructions for Form W-4 provides a worksheet to help you determine how many allowances to take. Be sure your employer is using the most recent version of Form W-4.

Vermont Income Tax Withholding: Form W-4VT

The Vermont Department of Taxes encourages all employees to complete Vermont Form W-4VT so the employer has the information needed to calculate Vermont withholding. Not all employers ask their employees to complete Form W-4VT because the form is not required. However, as federal and Vermont tax laws have changed, withholding for federal taxes may no longer work for Vermont taxes.

Like federal Form W-4, it is important to complete this as accurately as possible so that your employer will withhold the right amount of Vermont tax from each paycheck. Form W-4VT includes a worksheet to help you figure out how many allowances to take. Be sure your employer is using the most recent version of Form W-4VT.

Next, we'll show you how to file these forms