Tax withholding refers to the automatic deduction of income taxes from an employee’s paycheck by their employer. These withheld taxes are sent to the IRS and applied to the employee’s total tax liability for the year. The goal of tax withholding is to ensure that taxes are paid throughout the year, preventing taxpayers from owing a large amount when they file their annual return.
The amount withheld is based on the employee’s earnings, filing status, and the number of withholding allowances they claim on Form W-4. Employees can adjust their withholding at any time by submitting a new W-4 to their employer, which can increase or decrease the amount withheld based on their financial situation and tax liability.
If too much tax is withheld during the year, the taxpayer will receive a refund when they file their return. If too little is withheld, the taxpayer may owe additional taxes, plus potential penalties for underpayment.
Tax withholding applies to both federal and state income taxes (where applicable), and accurate withholding is essential for avoiding financial surprises at tax time.