What it is:
Withholding refers to withholding tax, which is an amount that employers withhold from an employee's paycheck and remit to local and federal taxing authorities on behalf of the employee.
How it works (Example):
For example, let's say John Doe's salary is $24,000 a federal income tax, state , , and liabilities.. Though he makes $2,000 a month, he only brings home $1,800 because his employer takes $200 out of his paycheck and remits it to the state and the federal government on his behalf. The payments go toward John Doe's
The amount of withholding is influenced by what John Doe IRS Form W-4 ("Employee's Withholding Allowance 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.on his
Withholding tax applies toearned 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 ; they typically make quarterly estimated payments instead.
Why it Matters:
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 steady tax refund. It is important to that accuracy in is crucial; any mistakes in remitting withholding tax are generally the 's problem even if they are the employer's fault.throughout 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