What it is:
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.
How it works (Example):
The amount of withholding is influenced by what John Doe 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.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 taxes; 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 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.