Withholding is the share of your paycheck your employer sends directly to the IRS on your behalf. It's not a tax in itself — it's prepayment of the income tax you'll owe at year-end. The W-4 form you fill out at hiring determines how much.
The current W-4 (revised 2020) skipped the old "allowances" concept and instead asks for:
- Multiple jobs or spouse with a job (Step 2)
- Dependents (Step 3) — this reduces withholding
- Other income or deductions (Step 4) — adjusts withholding up or down
- Extra withholding (Step 4c) — flat extra dollars per paycheck
For tipped workers: your withholding is calculated on the W-2 wage + reported tip income, but the cash you actually receive may be just the wage portion. If your direct wage is low (e.g., $2.13/hr), there may not be enough cash to withhold all the tax owed on tips. The shortfall goes in Box 12 code A of your W-2 and you owe it on your 1040.
Many tipped workers add extra withholding via Step 4c to avoid an April surprise. It comes out of each paycheck and is treated like any other federal withholding.