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Withholding Tax
Definition
Withholding tax is the portion of an employee's wages that an employer sends directly to the government as a prepayment of the employee's income tax liability.
Explanation
Employers calculate withholding based on the employee's W-4 form, which indicates filing status, number of dependents, and additional withholding requests. The goal is to withhold enough to cover the annual tax liability without creating a large refund or balance due at tax time.
Self-employed individuals typically pay estimated taxes quarterly since there is no employer to withhold from their income.
Example
An employee who claims fewer allowances on their W-4 will have more tax withheld from each paycheck, reducing the likelihood of owing taxes at filing time.