What is Federal Income Tax? The federal income tax is a pay-asyou-go tax. You must pay the tax as you earn or receive income during the year. Wage earners pay federal income tax by having it withheld from their pay during the year. This is your “withholding.” Your withholding is based on the number of allowances you claim when you file Form W-4, Employee’s Withholding Allowance Certificate, with your employer. Form W-4, Employee’s Withholding Allowance Certificate, includes the following information: n Your marital status n The number of withholding allowances you are claiming n Any additional withholding amount you are requesting n Qualification of exempt status The amount of tax the employer withholds from the taxpayer’s wages depends on: n The amount you earn n How often you are paid n