Posted on December 2, 2025
We now have three consecutive months–September through November–in which we estimate that growth in federal tax withholding was in the range of 3.5 percent to 4.2 percent (compared to year-ago amounts), slower than the range of 5 percent to 7 percent that withholding has grown in most of the past two and a half years (see the chart below). Federal tax withholding comprises income and payroll taxes withheld from workers’ paychecks and remitted by the employers to the Treasury Department as quickly as the day after the workers are paid. Because wages and salaries are a primary determinant of the tax withholding amounts, changes in withholding track changes in economywide wages and salaries over long periods of time (again, see the chart below). We measure growth by comparing the amount of withholding in one month to the amount in the same month of the prior year–so-called year-over-year growth. We also adjust the withholding growth measures to standardize the business days across months and to remove the estimated effects of changes in tax laws (which haven’t affected our growth estimates for about two years).
The slowdown in tax withholding in the past three months does not seem to be reaching recession levels. Withholding is, however, measured in nominal (not inflation-adjusted) dollars, so growth that gets into the 3 percent range does come close to the rate of inflation, and thus could be consistent with only small amounts of real (inflation-adjusted) growth. A part of the withholding slowdown in October is likely related to the recent federal government shutdown. But September was before the shutdown, and the shutdown effects in November should be reduced in our estimates by the combination of our roughly one-month smoothing of the withholding data and the fact that government workers received back pay in November that should be incorporated into the withholding amounts. Withholding in the months of December and January can always be harder to interpret, because the amounts can move around significantly as a result of year-end bonuses on Wall Street and beyond. Early reports are that financial market bonuses overall are set to grow strongly during this December-January period, so we shall see if that gets reflected in a bit of a rebound in withholding growth.
