If you’ve come across the term “withholding allowances” in an employee’s old W-4, it’s not a typo—it’s the method employers previously used to calculate federal income tax withholding, or the amount of tax taken out of an employee’s paycheck. The IRS retired withholding allowances when they restructured the 2020 Form W-4 to align with the Tax Cuts and Jobs Act of 2017.
Even though withholding allowances aren’t a part of payroll anymore, understanding the concept can help you as an employer understand the current W-4 and tax withholding in general.
How withholding allowances worked
An employee’s withholding allowances were based on their tax filing status and how many jobs and dependents they had. In general, allowances worked this way:
More allowances = Less tax withheld from pay
Fewer allowances = More tax withheld from pay
Before 2018, the tax code let you subtract a flat dollar amount from your taxable income for yourself, your spouse, and each dependent—separate from the standard deduction. The IRS published that amount every year (for reference, it was $4,050 per allowance annually for 2017). So a married couple with two kids could subtract 4 × $4,050 = $16,200 from their income before it was taxed, just from exemptions alone (in addition to their standard or itemized deductions).
Employees calculated their number of allowances using the W-4's "Personal Allowances Worksheet" (here’s the 2019 version if you’re curious). They could claim:
1 for themselves
1 more if they were single with one job, or married filing jointly with one job and a non-working spouse
1 for a spouse who didn’t work
1 for each dependent
Extra allowances tied to credits like the Child Tax Credit
Once the Tax Cuts and Jobs Act took away the personal and dependency exemptions, the concept of withholding allowances became obsolete.
What replaced withholding allowances?
Now, instead of employees using a worksheet to convert their situation into an abstract number of allowances that translate into a dollar reduction, today’s W-4 has employees enter dependents and credits directly.
Instead of a single allowances number, the current W-4 asks for more direct information:
Filing status
Whether the employee holds multiple jobs (or their spouse works)
Dependents, converted straight into a dollar tax credit amount
Other income, deductions, or extra withholding, entered as actual dollar figures
The withholding formula uses these real numbers with no allowance-to-dollar conversion step in between.
The idea with both systems, allowances and the current form W-4, is to align your take-home pay with your actual tax liability throughout the year so that neither you or the IRS has more of each other’s money than owed.
Get step-by-step guidance on how to fill out the 2026 W4 form here.
FAQs
Do states still use withholding allowances?
Yes, a few states still list allowances on their own withholding forms. Georgia is an example: as of 2024, the state changed how it actually calculates withholding, and that calculation no longer uses the "Total Allowances" number. But the G-4 form itself still has that field, so the terminology hasn't caught up to the state's own updated method.
What happened if an employee claimed the wrong number of allowances?
If an employee claimed the wrong number of withholding allowances, it either meant having too much or too little tax withheld. When too much tax was withheld, the employee received a tax refund after filing their tax return. On the other hand, an employee who didn’t withhold enough could end up owing more on their tax bill and risk being penalized.
Why did the IRS eliminate withholding allowances?
The IRS eliminated withholding allowances because the Tax Cuts and Jobs Act of 2017 reduced the personal and dependency exemption amount to $0, removing the tax return figure that allowances mirrored. The IRS redesigned the W-4 for 2020 to calculate withholding from direct dollar entries instead.
Can employees still claim allowances on their federal W-4?
No, the federal W-4 hasn't used withholding allowances since the IRS redesigned the form for 2020. Current versions ask for filing status, dependents, and other income as dollar amounts rather than an allowance number. Employees who haven't submitted a new W-4 since 2019 may still have an old allowance-based form on file, but new submissions need to use the current W-4.
How does the 2026 IRS form W-4 work?
Instead of allowances, today's form W-4 has employees enter five pieces of information: filing status, adjustments for multiple jobs or a working spouse, dependent credits entered as actual dollar amounts, other income or deductions, and any extra withholding. Employers apply these dollar figures directly to calculate each paycheck's withholding, with no allowance-to-dollar conversion step involved.
