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.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.
References in periodicals archive ?
The legislation would extend the job retention tax credit by lowering investment thresholds, thereby allowing certain auto and auto parts manufacturers to qualify for the tax credit.
Bank of Ireland said exceptional items in the first half comprised pounds 40 million in severance costs as part of a rationalisation programme, and pounds 21 million in settlement of Deposit Interest Retention Tax liabilities arising out of Ireland's DIRT tax-evasion scandal.
ONE of the smaller liabilities to fall due on Deposit Income Retention Tax (DIRT) following the hard-hitting findings of a parliamentary committee into the way banks and financial institutions handled the tax, has been settled.
It was alleged that in 2003 and 2004 they conspired to hide or omit accounts connected to Mr FitzPatrick from Anglo's banking system or from documentation provided to Revenue, which was investigating bogus non-resident accounts which may have been liable for Deposit Interest Retention Tax. The case against O'Mahoney was that he asked employees to conceal bank accounts from inspectors.
Expanding Ohio's Job Retention Tax Credit to help the state's ailing automotive manufacturers would diminish state tax revenue and cost Ohio jobs, according to Policy Matters Ohio.
The department regained the amounts through a collaborative project with revenue focusing on people who pay Deposit Interest Retention Tax on large deposits in their bank accounts but who also claim social welfare.
* Increases the maximum term of the existing job retention tax credit from ten to 15 years.
Revenue was investigating such accounts to see if they were bogus and if Deposit Interest Retention Tax was owed on them as a result.
The Deposit Interest Retention Tax refund on savings for first-time buyers is another sweetener as the levels of interest being paid are so low the rebate will be very small.