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 of the employee requests.
What Is the Purpose of Withholding?
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 and 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 the tax liability of both businesses and individuals when they file their taxes. 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 income tax purposes, but D.C. employers would.
History of Withholding
Tax withholding was originally introduced by Congress in the Tariff Act of 1913 but was repealed by the Income Act of 1916. In 1943, Congress passed the Current Tax Payments Act, which required employers to withhold federal income taxes from workers’ paychecks and remit them as tax payments to the government.Share