There are several definitions for the term ‘allowances’. With payroll, allowances are the amount of adjustments to an employees paycheck to determine the final federal income tax to withhold from each paycheck. An employee prepares a Form W-4 to determine the number of allowances in calculating the withholding amount. An allowance is similar to the number of dependents in your household. Single equals one, married equals two and add one for each child you care for in your household. With sales, allowances refer to the amounts granted to a customer to solidify the sale or eliminate a return.

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