What is withholding tax?

Withholding tax refers to the amount of an employee's wages that an employer deducts and sends directly to the government before the employee receives their paycheck. This process is established to ensure that workers meet their tax obligations throughout the year rather than paying the full amount at tax time. The funds withheld are applied toward the employee's expected income tax liability, which helps to prevent underpayment and the potential for large tax bills when filing tax returns.

Employers are required to calculate the appropriate amount of tax to withhold based on various factors such as the employee's earnings, tax filing status, and any exemptions the employee claims. The withheld amount includes federal income tax and may also consist of state and local taxes, as well as contributions to social security and Medicare.

Understanding withholding tax is essential for both employees and employers to ensure compliance with tax regulations and to manage tax liabilities effectively throughout the year.