Withholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount the employee requests.
What Is the Purpose of a Windfall Profits Tax?
In most jurisdictions, withholding happens in the context of wage income. Rather than forcing a taxpayer or business to pay the entirety of their tax liability to the federal, state, or local government at a single point in time, businesses withhold or “keep back” a small portion of income to be given to the government throughout the year. More often than not, this reduces additional taxes owed at filing. Ideally, income tax withholding matches income tax liability when filing the income tax return.
How Much Income Does Each Employer Withhold and for What Reasons?
First, employers withhold a small portion of wages for personal income taxes, which is then sent to the IRS. Any personal tax not already remitted is paid in April when employees file their annual taxes. Second, employees withhold wages to pay the employee-side of payroll taxes. Third, employers will usually withhold income to pay state or local income taxes, if applicable. For example, Texas has no income tax, but the District of Columbia does. Employers in Texas would not withhold income for state income tax purposes, but DC employers would.
History
Precedent for withholding taxes dates to the American Civil War. To raise revenue for the war effort, Congress passed the Revenue Act of 1862, which created the nation’s first progressive income tax and allowed the newly created office of the Commissioner of the Revenue to withhold taxes owed by federal workers. This withholding was done at the source to ensure timely collection and would last until 1864, when the act was revised to exempt all federal salaries from taxation. The income tax law would be repealed entirely in 1872, and a replacement introduced in 1894, which would subsequently be found unconstitutional.
Following the ratification of the 16th Amendment, Congress passed the Revenue Act of 1913, reestablishing the federal income tax and allowing for tax withholding.
Fast forward to World War II, and Congress passed the Current Tax Payments Act in 1943, which required employers to withhold federal income taxes from workers’ paychecks and remit them as tax payments to the government. Since then, the tax withholding system has remained in effect, enabling the federal government to collect revenue quickly to fund various programs.
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