Understanding & Directing Your Withholdings

Mar 22, 2022 Work Life

Paycheck withholdings are a fact of life for most workers, but they aren’t set in stone. Take a more proactive approach with these tips.

A woman sitting at a bakery and using a tablet, she is also looking at papers that have charts on them.

When you first receive your paycheck, the most important thing you’ll notice is your take-home pay. More than likely, you’ll skip over the list of deductions and start subtracting your bills or your day-to-day purchases from your take-home amount. However, hiding in the often overlooked payroll withholdings, you may find some untapped potential.

While it might seem like the right idea is to accept your withholdings as a given and hope for a big refund at tax time, you’re better off taking a more proactive approach. With a closer look at your life situation and a touch of math, you can wind up with more pocket money and increased financial well-being.

Learn The Terms

You may have noticed that your pay stub is riddled with abbreviations. The first hurdle to get over when it comes to understanding your withholdings is to be clear on the terms. First, you have federal taxes (FT for Federal Tax or FWT for Federal Tax Withheld) and state taxes (ST for State Tax or SWT for State Tax Withheld).

You’ll also see some other abbreviated terms such as FICA SS. This abbreviation represents a paycheck withholding from the Federal Insurance Contributions Act or FICA, and the SS indicates that this portion of your check goes to Social Security benefits. You may also find FICA MED, indicating contributions to Medicare. Medicare subsidizes healthcare costs for people over 65, as well as those who collect Social Security Disability Insurance (SSDI) benefits. Sometimes these two FICA taxes will be grouped together on your pay stub, in which case it will just show up as FICA tax.

A handful of states also withhold State Disability Insurance (SDI), which covers people who can’t work due to temporary disability. Depending on your profession and your location, you may find other abbreviations to indicate further paycheck withholdings. You can always look them up yourself, but the surest bet is often to contact your company’s HR department.

Finally, you may also have noticed YTD amounts. The YTD stands for Year To Date, and shows the running total for each category within the current tax year. YTD amounts are useful for estimating your yearly income figures, and for comparing those figures to other years. If the YTD figures aren’t provided on your pay stub, you can always figure them out by adding together all of your paychecks for the year.

A man walking through a field.
Reach Your Goals


Take advantage of free financial education from our partner, BALANCE. From confidential coaching to videos and articles, get the resources you need to help with your fiscal matters.

Manage The Math

If you want to get your withholdings right, you’ve got to crunch the numbers. Luckily, there are numerous online withholding calculators that you can use to make the process quick and easy. Everyone — from the IRS to tax service providers — has their own version, but the basic concept is the same. Using the figures from recent tax returns and pay stubs, you can calculate your estimated yearly income as well as the resulting withholdings, and then optimize your earnings.

Withholding Allowances

The key to maximizing your take-home pay is taking full advantage of withholding allowances. Tax allowances are factored in when your employer calculates how much federal income tax to withhold from your pay. The more allowances you claim, the less money is withheld from each paycheck. Using a W-4 form, you can claim a variety of allowances depending on your marital status, number of dependents, property taxes, federal student loans, child care, and more.

Typically, your employer will give you a W-4 form to fill out at the beginning of your employment, and sometimes each year thereafter. You should make sure any pertinent changes are reflected on an ongoing basis. You can always fill out a new W-4 form yourself when your personal financial situation changes in a way that impacts your tax allowances. Make sure to adjust your W-4 when you get married or divorced, have or adopt a child, get a second job, your spouse gets a job or changes jobs, or if you’ll be unemployed for part of the year.

Although it always seems best to maximize your take-home pay now, you generally want to use caution, and stay away from claiming too many allowances. If your employer doesn’t withhold enough from each paycheck, you may end up with the nasty surprise of a large tax bill when you complete your yearly income tax return. Worse still, the outstanding balance might be subject to penalties.

Free Your Refund

For many people, tax refunds are a bit of a guessing game. You prepare your taxes, send them off and wait, hoping for as many dollars as possible to come back your way. Although having a special yearly bonus can be enticing, it pays to remember that every dollar was yours in the first place. You work hard to earn what you make, so why wait a whole year to reap the rewards?

When you get a tax refund, that just means that the government has withheld too much of your pay and is giving it back. You’ve essentially provided the government with an interest-free loan. You can make better use of that money month to month, when it’s properly invested, saved up for a rainy day, or spent on purchases that help with your everyday needs. Plus, that way you can rest assured that you’re making the most of your income. Just imagine if your refund could earn interest all year long, or contribute to a better everyday life instead of disappearing as quickly as it showed up in your account.

A woman on a paddleboard with a dog next to her.
Life Guidance for:

Personal Finances

Financial health is a key part of overall wellness. Count on us to provide the knowledge and tools you need to make sense of your money, better your financial journey, and improve your peace of mind.

Related Articles

Banking on each other.
Building stronger communities.®