withholding tax

noun

Updated on: 7 Apr 2018

Definition of withholding tax

: a deduction (as from wages, fees, or dividends) levied at a source of income as advance payment on income tax

See withholding tax defined for English-language learners

Recent Examples of withholding tax from the Web

That’s because paying the tax man as a gig worker isn’t as simple as for employees, whose bosses withhold taxes from their paychecks.

— aimee picchi, USA TODAY, "Making money in the gig economy? Avoid these 5 tax mistakes," 4 Apr. 2018
In April 2014, the partners began assessing a 1 percent employee-withholding tax and a 1 percent net-profits tax for businesses in township commercial areas on Wooster Pike, on Plainville Road and at Ridge Road and Highland Avenue.

— jeanne houck, Cincinnati.com, "Keep eye out for changes at Ridgewater Plaza in Columbia Twp.," 14 Feb. 2018
Meaning, the shipping companies don’t withhold taxes or pay benefits.

— ed wallace, star-telegram, "The Real Infrastructure Plan," 3 Feb. 2018
Take time now to decide and allocate money needed for employee bonuses and withholding taxes.

— nathan corbitt, ajc, "Small Business Owners Should Review These Four Items Before Year End," 6 Nov. 2017
Global funds who pay withholding tax on investments should be able to get by with just one payment receipt, rather than having to file a separate tax return.

— shruti srivastava, Bloomberg.com, "Modi Seeks Simpler Rules to Raise Direct Tax Share From '07 Low," 9 Oct. 2017
Both Civica and the state House reported Fresen’s income to the IRS and withheld taxes.

— patricia mazzei, miamiherald, "Former Miami lawmaker sentenced to 60 days in jail for failing to file tax returns," 29 Sep. 2017
One was for a tax on the turnover rather than the profits of digital firms, another would put a levy on online ads, and a third would impose a withholding tax on payments to internet firms.

— reuters, Fortune, "Why Google, Facebook, Amazon, and Netflix Might Soon Face Higher Taxes in Europe," 21 Sep. 2017
Kansas and Missouri have similar tax break programs that allow companies to keep 95 percent of employee withholding taxes as an inducement to attract new companies and keep existing ones.

— mark davis, lynn horsley and steve vockrodt, kansascity, "Does KC have a shot at Amazon HQ2?," 15 Sep. 2017

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'withholding tax.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of withholding tax

1940

Financial Definition of WITHHOLDING TAX

withholding tax

noun

What It Is

Withholding tax is an amount that employers withhold from an employee's paycheck and remit to local and federal taxing authorities on behalf of the employee.

How It Works

For example, let's say John Doe's salary is $24,000 a year. Though he makes $2,000 a month, he only brings home, say, $1,800 because his employer takes $200 out of his paycheck and remits it to the state and the federal government on his behalf. The payments go toward John Doe's federal income tax, state income tax, unemployment, and Medicare liabilities.

The amount of withholding is influenced by what John Doe puts on his IRS Form W-4 ("Employee's Withholding Allowance Certificate"), which he provides to the employer and on which he indicates how many dependents he has and his marital status, among other things. A copy goes directly to the IRS. Generally, the more allowances the employee claims on a Form W-4, the lower the withholding tax.

Withholding tax applies to income earned through wages, pensions, bonuses, commissions, and gambling winnings. Dividends and capital gains, for example, are not subject to withholding tax. Self-employed people generally don't pay withholding taxes; they typically make quarterly estimated payments instead.

Why It Matters

Withholding tax prevents people from being blindsided by huge tax bills on April 15. By having their employers remit a little out of each paycheck, federal and local governments also ensure steady cash flow throughout the year and reduce the risk that taxpayers will be unable to pay their taxes. A person's tax liability may still be more or less than what he or she pays in withholding taxes in a year. In those cases, the taxpayer may have to pay more money on April 15 or may receive a tax refund. It is important to note that accuracy in payroll is crucial; any mistakes in remitting withholding tax are generally the taxpayer's problem even if they are the employer's fault.

Source: Investing Answers