Tax withholding is the percentage of income, typically from wages, salaries, bonuses, commissions, and self-employment income, that is taken from gross pay and sent to the federal and state governments. This payment is sent to cover income taxes owed by the taxpayer. It’s important to understand how tax withholding works particularly when you are a business owner or employee who has a W2 or 1099 from your employer.
The Basics of Tax Withholding
When you complete a W-4 form at the time of hire, you will indicate your marital status and the number of dependents you have. This will determine the amount that will be withheld from each paycheck. Generally, the more allowances claimed the less tax that will be withheld. Additionally, if you are an employee, federal and state income taxes are withheld from your paycheck. However, if you are self-employed, your income taxes are paid quarterly.
Estimated Tax Withholding Payments
Sometimes, withholding is not enough to cover a taxpayer’s estimated tax liability. This is particularly true for those who have consistent income from multiple sources or those whose income levels may be above the preset deductions from a W-4 form. When this happens, taxpayers may need to make estimated tax withholding payments throughout the year on a quarterly basis. These payments are designed to help the taxpayer comply with the Internal Revenue Service’s (IRS) estimated tax requirements.
The Benefits of Withholding Taxes
Tax withholding benefits both employees and employers. Employers benefit from the taxes withheld from their employees’ salaries because it reduces the amount of taxes they owe. Employees benefit because the amount of taxes they pay is reduced. Additionally, this helps prevent tax delinquency, as taxpayers are less likely to owe large sums of money at tax time if they’ve been consistently paying taxes throughout the year.
Where Does Tax Withholding Go?
Tax withholding from an employee’s paycheck is sent to the federal and state governments to pay the taxpayer’s income taxes. The employer will make a deposit, usually on a monthly basis, and the government will credit the taxpayers’ account with the amount deposited on their behalf. At the end of the year, the taxpayer’s income tax liability will be determined and they will receive a refund for the taxes that were paid in excess of their tax liability.
Conclusion
Tax withholding is an important part of federal and state taxes. It helps taxpayers stay in good compliance with the IRS and also helps prevent them from owing large sums of money at tax time. Employers are encouraged to make sure that their employees are regularly withholding taxes, and taxpayers should make sure that they are withholding enough to cover their estimated tax liability.