Withholding Tax
Income tax deducted directly from wages or payments at the source, before the recipient receives the funds.
What is Withholding Tax?
Withholding tax is income tax that an employer or payer deducts from wages, salaries, or other payments before disbursing them to the employee or recipient. The withheld amount is remitted to the IRS (and state tax authorities) as a pre-payment toward the taxpayer's annual tax liability. For employees, the amount withheld is guided by the W-4 form, which captures filing status and adjustments. If too little is withheld, the taxpayer owes a balance and may owe an underpayment penalty; if too much is withheld, they receive a tax refund. Withholding also applies to certain investment payments such as backup withholding (28%) on 1099 income when a taxpayer fails to furnish a correct Tax Identification Number.
Example
An employee earning $6,000 per month in salary has federal income tax withheld from each paycheck based on their W-4 elections. If they filed as Single with no adjustments, roughly $850 per month is withheld. Over 12 months, $10,200 is withheld; their actual annual tax liability is $9,800, so they receive a $400 federal tax refund when they file.