Withholding Tax

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Withholding Tax

The amount legally deducted from an employee's wages or salary by the employer, who uses it to prepay the charges imposed by the government on the employee's yearly earnings.

The federal Income Tax system is a "pay-asyou-go" system that requires wage earners to pay federal tax as they earn income. The federal government enforces this system through a withholding tax on wages and salary income. A taxpayer who does not have enough tax withheld may be subject to penalties for underpayment.

In 1942 the federal government instituted a one-time withholding tax as a revenue-raising device during World War II. Withholding taxes are now a permanent method of collecting income taxes at the state and federal levels. Each pay period an employer is required to withhold tax from each employee's gross salary and send it to the Internal Revenue Service (IRS) and to the state revenue collection agency, if the state has an income tax.

When a person is hired for a salaried job, the new employee must complete a federal W-4 form, which authorizes the employer to retain a certain amount of the employee's earnings to be forwarded to the government to satisfy the employee's federal income tax liability. The W-4 consists of a certificate showing the withholding allowances claimed by the employee and a worksheet in the form of an abbreviated tax return. The employee estimates her income, deductions, credits, and exemptions to determine how many withholding allowances to claim. The more allowances claimed, the less tax is taken out each pay period. The goal is to have the withheld taxes equal the yearly tax liability.

Taxpayers who underestimate the withholding tax needed to satisfy their tax liability may have to pay a penalty for underpayment. The IRS encourages taxpayers to review their financial situation periodically and file amended W-4 forms.

Backup withholding is a way of assuring that tax is paid on dividend and interest income. If a taxpayer does not provide his Social Security number to the payer of dividend or interest income, such as a bank, the institution must withhold a "backup" of 31 percent of each payment until the taxpayer provides the number.

References in periodicals archive ?
Meanwhile, according to our Quetta correspondent, shutter-down strike was observed in the Balochistan capital against imposition of withholding tax.
withholding agents must generally file tax and information returns with the IRS to report FDAP income paid to foreign payees along with any tax withheld on Form 1042, Annual Withholding Tax Return for U.
When the finance bill was presented, the industrial sector voiced its opposition to the proposed withholding tax on electricity bills.
Mir had also announced to observe strike on August 5 against the withholding tax imposition on banking transactions.
With the issuance of the ordinance, the finance ministers commitment with the business community for reduction of withholding tax stands fulfilled, said a press release.
Federal Board of Revenue (FBR) Chairman Sohail Ahmed said that the FBR and the State Bank of Pakistan (SBP) would soon convene a meeting to discuss the issue of withholding tax on different modes of banking transactions.
901(1) prevents taxpayers from "purchasing" FTCs by acquiring short-term ownership of property that generates income (other than dividends) or gain subject to a gross-basis foreign withholding tax.
This book should have some value for most of the professionals who are likely to come into contact with international withholding tax.
The government is set to abolish the withholding tax option in April 2003 and leave only the other capital gains tax.
A subcommittee of the government's Tax Commission unveiled Tuesday a draft proposal that the abolition of a withholding tax on securities transactions be forwarded from April 2003 to an unspecified date.
They discussed the issue of withholding tax on banking transactions with the minister in detail and informed about meetings with traders and representatives of various business spheres to ascertain their standpoint and apprehensions with regard to the withholding tax.
ISLAMABAD -- Minister for Finance Ishaq Dar Saturday called on Prime Minister Mohammad Nawaz Sharif and solicited in principle approval for issuance of ordinance on adjustment of withholding tax.