Withholding tax is a tax paid to the government by the payer of the income rather than by the recipient of the income. It is also known as tax retention, Pay-As-You-Go/Pay-As-You-Earn, tax deduction at source, or a Prélèvement à la source. The tax is thus withheld or deducted from the income due to the recipient. Tax withholding applies to employment income in most jurisdictions, and many jurisdictions also require withholding taxes on payments of interest or dividends. Withholding tax is a way for the government to maintain its pay-as-you-go income tax system, which means taxing individuals at the source of income rather than trying to collect income tax after wages are earned.
The amount of tax withheld on income payments other than employment income is usually a fixed percentage. In the case of employment income, the amount of withheld tax is often based on an estimate of the employees final tax liability, determined either by the employee or by the employer. Withholding tax is one of two types of payroll taxes, the other type being paid to the government by the employer and based on an individual employee’s wages. It contributes to funding for Social Security and federal unemployment programs as well as Medicare.
The purpose of withholding is to reduce the tax liability of both businesses and individuals when they file their taxes. Rather than forcing a taxpayer or business to pay the entirety of their tax liability to the government at a single point in time, businesses withhold or “keep back” a small portion of income to be given to the government throughout the year. The amount of tax withheld from an employees pay depends on what they earn each pay period and what information they gave their employer on Form W-4 when they started working. This information, like their filing status, can affect the tax rate used to calculate their withholding.
To check and change tax withholding, individuals can use the IRS Tax Withholding for Individuals page to know when to check their withholding and use the withholding estimator tool to estimate their tax withholding. They can also submit a new Form W-4 to their employer if they want to change the withholding from their regular pay or complete Form W-4P to change the withholding from their pension or annuity.
