Withholding Allowance Law and Legal Definition

A withholding allowance by an employee reduces the amount of wages subject to federal income tax withholding. An employee can claim the number of withholding allowances that they are entitled to based on the Form W-4, Employee's Withholding Allowance Certificate, worksheets. An employee can claim less than you are entitled, but not more. An employee may not arbitrarily pick a number with the goal of avoiding income tax withholding. The law provides for a civil penalty of $500 for filing a false statement on Form W-4.

The employer also uses the total amount of income earned and marital status to figure out these allowances and exactly how much income tax to withhold from wages. Withholding allowances are given for:

  1. Personal and dependency exemptions.
  2. Special withholding allowances.
  3. Itemized deductions, tax credits and other items specified in the regulations.