Take a look at [IRS Publication 15][1]. This is your employer's "bible" for withholding the correct amount of taxes from your paycheck. Most payroll systems use what this publication defines as the "Percentage Method", because it requires less data to be entered into the system in order to correctly compute the amount of withholding.

The computation method is as follows:

1. Compute the employee's gross pay for the pay period (wages, tips, salary, commissions, etc).
2. Subtract any "pre-tax deductions" (med ins premiums, retirement, etc). This is the employee's "pre-tax net pay".
3. Divide $3800 (the amount one W-4 allowance is worth annually) by the number of pay periods in the tax year (e.g 26 for bi-weekly). Multiply this by the number of allowances claimed on the W-4 and subtract it from the pre-tax net pay to determine the "pay subject to withholding".
4. Taxes are computed "piecewise"; dollar amounts up to A are taxed at X%, and then dollar amounts between A and B are taxed at Y% so total taxes for A+B dollars are A*X+B*Y. Here is the table of rates for income earned on a daily basis by a person filing as Single:

        More Than   But Less Than   W/H Base   W/H Pct
           0.00        8.30           0.00      0%
           8.30       41.70           0.00     10%
          41.70      144.20           3.34     15%
         144.20      337.70          18.72     25%
         337.70      695.40          67.10     28%
         695.40     1501.90         167.26     33%
        1501.90                     433.41     35%

 To use this table, multiply all the dollar amounts by the number of days in the pay period. Find the range in which your pay subject to withholding falls, subtract the "more than" amount from the range, multiply the remainder by the "W/H Pct" for that line, and add that amount to the "W/H Base" amount (which is the cumulative amount of all lower tax brackets). This is the amount that will be withheld from your paycheck if you file Single or Married Filing Separately in the 2012 TY. If you file Married Filing Jointly, the amounts defining the tax brackets are slightly different (there's a pretty substantial "marriage advantage" right now; withholding for a married person in average wage-earning range is half or less than a person filing Single.).

In your particular example of $2500 biweekly (figured on 10 business days/pp even if you work every day), with no allowances and no pre-tax deductions:

    $2500 / 10 = $250 // you're in the 25% bracket
    $144.20 * 10 = $1442.00 //amount for which tax is included in the tax base
    $18.72 * 10 = $187.20 //W/H base for $1442.00
    $2500 - $1442.00 = $1058.00 //Amount subject to 25% tax
    $1058.00 * .25 = $264.50 //Addtl tax for 25% bracket
    $264.50 + 187.20 = $451.70 //Total Fed W/H

So, with zero allowances, your employer should be taking a maximum of $450 out of your paycheck for federal withholding. Now, that doesn't include PA state taxes of 3.07%, plus other state and federal taxes like SS, Medicare/Medicaid, and FUTA/SUTA. But, you also don't get a refund on those when you fill out the 1040 (except in an exceptional case which requires you to have two jobs in a year that, together, exceed the wage base for Soc Sec).

If you claim 3 allowances on your federal taxes, all other things being equal, your taxable wages are reduced by $438.45, leaving you with taxable income of 2061.55. Still in the 25% bracket, but the wages subject to that level are only $619.55, for taxes in the 25% bracket of $154.89, plus the withholding base of $187.20 equals total federal withholding of $342.09 per paycheck, a savings of about $110pp.

  [1]: http://www.irs.gov/publications/p15/ar02.html