what is withholding tax?

Withholding tax is an amount of income tax that an employer or payer deducts from an individual’s paycheck or payment and directly remits to the government. It serves as a prepayment of the recipient’s income tax liability for the year. This system helps governments collect taxes gradually and reduce the risk of tax evasion by taxing income at the source instead of waiting until after income is received. The withheld tax is credited against the individual's overall annual income tax. If too much is withheld, the individual receives a refund when filing their tax return; if too little is withheld, they owe more tax. Withholding tax applies widely to employment income and can also apply to payments like interest, dividends, royalties, and rent, often with different rates depending on the recipient’s residency status and the nature of income. Essentially, withholding tax shifts the responsibility of tax payment from the income recipient to the payer to ensure tax compliance.