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 ?
In line with the policy, it has increased the number of withholding tax in the past five budgets to around 74 in addition to multiplying the tax rates.
They said that measures like imposition of withholding tax on bank transactions are not doing any service to the economy as it has been observed that tax collection machinery has no authentic data to specify difference between filers and non-filers.
16 plus 30% in excess of P2,192, or a total withholding tax of P448.
The levies of withholding tax on banking transactions would discourage the savers and is not useful for economy.
In a review petition, the government again requested to allow withholding tax on dividends as pass-through without any caps.
In addition, income that would otherwise be FDAP income is not subject to the 30% gross basis withholding tax if it is derived from the conduct of a U.
However, the amended bill approved by the NA has imposed a 10 percent withholding tax on commercial consumers.
The future implementation of the 3% withholding tax on most government contracts is authorized by section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.
Moreover, only a small portion of the withholding tax revenues currently collected by Canada relates to withholding on interest.
Belgium, Luxembourg and Austria will apply a 15% withholding tax for the first three years (2005-2007), 20% over the next three years (2008-2010) and 35% after 2011.
California had required a real estate withholding tax to be completed with the sale, and now the client was due a sizeable refund--except the withholding was credited to the trust, not to her.
Finance Minister Masajuro Shiokawa urged the ruling coalition parties Friday to decide quickly to abolish the withholding tax on capital gains on stocks.