What Are Allowances in Taxes? The W-4 Change Two-Earner Families Miss

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

Allowances were the number you entered on the old federal Form W-4 to tell your employer how much income tax to hold back from each paycheck. Each allowance reduced your withholding, so more allowances meant bigger paychecks and fewer meant more tax taken out. The IRS removed allowances from Form W-4 starting in 2020, and the 2026 Form W-4 uses dollar amounts instead: a two-earner checkbox, credits for children, other income, deductions and extra withholding.

For a two-income household in California or Washington earning $750,000 to $3 million, the word “allowance” matters less than what replaced it. The new form is built around one paycheck at a time. When both parents work and one or both receive RSUs, the default settings usually under-withhold by tens of thousands of dollars, and the bill shows up in April.

What allowances meant on the old W-4

Before 2020, each allowance stood for a slice of income your employer treated as untaxed when it calculated withholding. You typically claimed one for yourself, one for a spouse and one for each dependent, and could add more if you expected large itemized deductions. Claiming “0” meant the most withholding. Claiming many meant the least.

The system was tied to personal exemptions. When the 2017 tax law set the personal exemption to zero, the allowance had nothing left to measure, so the IRS redesigned the form. An old form can still be on file: IRS Publication 505 still includes instructions for people whose withholding is based on a 2019 or earlier Form W-4. If you have not changed jobs since then, check which version your employer is using.

What replaced allowances on the 2026 Form W-4

Why the old “claim your kids” habit backfires above $400,000

Many parents still think of children as a reason to withhold less. On the 2026 form, Step 3 only applies if total income is $400,000 or less on a joint return. For 2026 the child tax credit is $2,200 per qualifying child, and it shrinks by $50 for each $1,000 of modified AGI above $400,000. A couple with two children loses the full $4,400 at $488,000. Entering $4,400 in Step 3 at a $1 million income cuts withholding for a credit you will not receive.

Worked example: two W-2 incomes and RSUs in California

Assumptions (illustrative, 2026 tax year, married filing jointly, two children ages 4 and 7):

• Parent A, a software engineer: $320,000 salary plus $380,000 of RSUs vesting during the year.
• Parent B, a physician employed by a hospital system: $350,000 salary.
• Total wages $1,050,000. Each parent defers $24,500 to a 401(k), the 2026 limit. Standard deduction of $32,200.
• Withholding figures below are estimates using the 2026 brackets. Actual payroll uses IRS Publication 15-T tables, so real numbers will differ somewhat.

The tax they actually owe

Taxable income is $1,050,000 minus $49,000 of 401(k) deferrals minus the $32,200 standard deduction, or $968,800. Using the 2026 joint brackets, federal income tax is about $280,620 ($206,583.50 on the first $768,700, plus 37% of the remaining $200,100). Add the 0.9% Additional Medicare Tax on $800,000 of wages above the $250,000 joint threshold, or $7,200. Total: about $287,820.

What gets withheld with default W-4s

• RSUs: the employer withholds the 22% flat supplemental rate, which is $83,600 on $380,000. The household is in the 37% bracket, so that leaves about $57,000 short on the RSUs alone.
• Salaries, Step 2 left blank: each employer applies the full standard deduction and the low brackets to its own paycheck. That is roughly $48,400 for Parent A and $55,600 for Parent B.
• Additional Medicare Tax: each employer withholds 0.9% only on the wages it pays above $200,000. Here that is $5,850, not $7,200.

Total withheld, including that $5,850, is about $193,400 against about $287,820 owed. The gap is roughly $94,000, before any tax on dividends or a sale of stock.

After checking the Step 2 box on both forms

With the box checked, each employer halves the standard deduction and the bracket widths. Estimated salary withholding rises to about $66,600 and $77,100, adding roughly $39,600. The remaining gap is about $54,800, close to the size of the RSU shortfall. Spread across 26 biweekly paychecks, that is about $2,110 per pay period entered in Step 4(c) on one parent’s form, or split between both.

The decision for this family is not “how many allowances.” It is two lines: check the Step 2 box on both forms, then cover the RSU gap with Step 4(c), quarterly estimated payments, or a combination.

How the underpayment penalty works at this income

Under-withholding is not only a cash-flow surprise. Under Publication 505 (2026), you generally owe estimated tax if you expect to owe at least $1,000 after withholding and credits, and your withholding falls short of the smaller of 90% of this year’s tax or 100% of last year’s tax. If your 2025 AGI was more than $150,000, the prior-year figure becomes 110%. For a family whose income jumped because a large RSU grant started vesting, 110% of last year’s tax is often the easier target to hit.

California still uses allowances on Form DE 4

This is where the word survives. California withholding runs on its own form, the DE 4, Employee’s Withholding Allowance Certificate (Rev. 56, 1-26), and it still counts allowances. Three rules matter for this reader:

• If you never file a DE 4, your employer must withhold as “Single with Zero withholding allowance.”
• Two-earner households should check “Single or Married (with two or more incomes)” and claim all allowances on the DE 4 for the higher-paying job, with zero on the other.
• “Additional allowances” on the DE 4 come from itemized deductions: one extra allowance for each $1,000 by which expected deductions exceed the standard deduction. Line 2 lets you request an extra dollar amount per paycheck, if your employer agrees.

California taxes RSU income and capital gains as ordinary income, with a top rate of 13.3% for 2025 (including the 1% Behavioral Health Services Tax on taxable income over $1,000,000). Separately, CA SDI takes 1.3% of all wages for 2026 with no cap: about $13,650 on $1,050,000 of household wages. That is a payroll tax, not something a DE 4 changes.

Washington: no state withholding form, but a change is coming

Washington has no individual income tax for 2026, so there is no state withholding certificate to complete. Payroll does deduct the WA Cares Fund premium of 0.58% of wages, with no wage cap. Two things to keep on the radar: the state’s 7% tax on long-term capital gains above the annual standard deduction (since 2025, 9.9% on gains over $1,000,000), and a new 9.9% income tax on AGI over $1,000,000 taking effect January 1, 2028. Families near that line will need to plan withholding or estimated payments for it once the Department of Revenue publishes guidance.

Common mistakes we see

1. Leaving Step 2 blank on both forms because each spouse filled out their W-4 alone.
2. Entering children in Step 3 at an income where the credit is zero.
3. Assuming the 22% RSU withholding is the tax. It is a withholding rate, not a bracket. Supplemental wages over $1,000,000 in a year are withheld at 37% regardless of the W-4.
4. Updating the W-4 but not the DE 4, or never filing a DE 4 at all.
5. Setting withholding once and not revisiting it when a new grant starts vesting or a spouse changes jobs.

What to write down for your kids

Withholding looks like paperwork, but it shows how your family handles a predictable bill: you estimate it, set aside the money and check it each year. Keep a one-page note with each parent’s W-4 and DE 4 settings, the Step 4(c) amount, and why you chose it. It saves time when a job changes, and it gives your children a real example of planning ahead. As Kevin Luu puts it: “Conversations fade. Documentation compounds.”

Frequently asked questions

How many federal allowances should I claim?

None. Federal allowances no longer exist on Form W-4 for forms filed in 2020 or later. Instead, married couples with two jobs check the Step 2 box on both forms or use the IRS estimator, list children in Step 3 only if joint income is $400,000 or less, and add any extra per-paycheck amount in Step 4(c). In California, allowances still apply on Form DE 4.

What does “additional allowances” mean?

On the old federal W-4 and on today’s California DE 4, additional allowances lowered withholding to account for expected deductions above the standard deduction. On the DE 4, you get one extra allowance for each $1,000 of estimated deductions over the standard deduction, calculated on Worksheet B. Families who take the standard deduction usually claim none.

Is claiming 0 allowances the same as withholding the most?

On the DE 4, “Single” with zero allowances produces the most withholding short of requesting an extra amount, and it is the default if you file nothing. On the federal form there is no zero to claim; the closest equivalent is checking Step 2, leaving Steps 3 and 4(b) blank and entering extra withholding in Step 4(c).

Next step

Pull your most recent pay stubs and RSU vest schedule, then run both jobs through the IRS Tax Withholding Estimator together before your next vest date. If equity, two incomes and estimated payments are more than you want to manage, our tax management work covers withholding as part of a yearly plan, alongside employee benefits and RSUs. For the line-by-line form, see our guide to filling out a W-4 with a dependent, and if you are deciding between joint and separate returns, read what happens if you file as single when married. For how these records fit into a family system, see family governance.

This is general education. The right withholding setup depends on your family’s full picture, including other income, deductions and state residency.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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