Definition
A withholding allowance is an input used in payroll tax withholding systems to estimate how much federal income tax should be withheld from a paycheck, based on household circumstances and expected deductions.
Why It Matters
Correct withholding reduces the risk of owing a large tax bill or over-withholding and getting an unnecessarily large refund.
Example
A worker adjusts withholding inputs so less tax is withheld after having a child.