Withholding tax may sound like a new concept, but there’s a good chance you’ve already dealt with it: As the name implies, it is withheld from most employees’ paychecks. The important thing is to make sure you’re having the right amount taken out.
What is withholding tax?
Withholding tax is the income tax your employer withholds from your paycheck and sends to the IRS on your behalf. If too much money is withheld throughout the year, you’ll receive a tax refund. If too little is withheld, you’ll probably owe money to the IRS when you file your tax return.
Who pays withholding tax?
Most employees are subject to withholding tax. Your employer is the one responsible for sending it to the IRS.
In order to be exempt from withholding tax you must have owed no federal income tax in the prior tax year and you must not expect to owe any federal income tax this tax year.
Understanding withholding tax
How much money is withheld from your paycheck depends on the Form W-4 that you'll fill out and give to your employer when you start your job. Information on that form includes:
Your filing status (if you’re single, married, etc.).
Whether you have your employer withhold additional amounts.
One thing to note: If your filing status is “married filing jointly,” you’ll likely have fewer tax dollars withheld than if you file as “head of household.”
Withholding tax is made up of federal, state, local and FICA taxes. FICA taxes (also called payroll taxes) include a 6.2% Social Security tax and a 1.45% Medicare tax. Learn more about FICA tax.
Withholding tax vs. estimated tax
Unlike withholding tax, estimated taxes are not paid by an employer. Estimated taxes are paid by people who earn income that is not subject to withholding. For example, someone who is self-employed may need to estimate their tax liability and make payments quarterly.