What is Withholding Tax?
Withholding tax is an amount that employers withhold from an employee's paycheck and remit to local and federal taxing authorities on behalf of the employee.
Example of Withholding Tax
For example, let's say John Doe's salary is $24,000 a federal income tax, state , , and Medicare liabilities.
The amount of withholding is influenced by what John Doe on his IRS Form W-4 ("Employee's Certificate"), which he provides to the employer and on which he indicates how many dependents he has and his marital status, among other things. A copy goes directly to the IRS. Generally, the more allowances the employee claims on a Form W-4, the lower the withholding tax.
Withholding tax applies to earned through wages, pensions, bonuses, commissions, and gambling winnings. Dividends and , for example, are not subject to withholding tax. Self-employed people generally don't pay withholding taxes; they typically make quarterly estimated payments instead.
Why do Withholding Taxes matter?
Withholding tax prevents people from being blindsided by huge tax bills on April 15. By having their employers remit a little out of each paycheck, federal and local governments also ensure steadythroughout the and reduce the risk that be unable to pay their . A person's may still be more or less than what he or she pays in withholding in a . In those cases, the may have to pay more on April 15 or may receive a . It is important to that accuracy in is crucial; any mistakes in remitting withholding are generally the 's problem even if they are the employer's fault.