Definition of Withholding Tax
The money deducted from an employee’s salary and send to state, federal or local tax authority is known as withholding tax. Before giving salary to employees, a certain amount called income tax is deducted. Income tax obliges every wage earner to pay tax as they earn salary. And a wage earner who fails to pay income tax is penalized by the government.
Explanation of Withholding Tax
During World War II, the federal government introduced withholding tax as a source of income raising device for the government. The people who earn must pay a specific percentage of his/her salary as an income tax. Withholding/ Income taxes are collected on both federal and state level. Every month an organization needs to deduct an income tax from its employee’s gross income and send the taxes withheld to the State Revenue Collector and Internal Revenue Service.
At time of hiring, a person must fill a W-4 form. This form permits an employer to deduct certain amount of money from employee’s salary for the purpose of sending it to the government. The W-4 forms have a certificate showing claims of withholding allowances. If the allowances claims are more then, the amount deducted from the income will be less and vice versa.
Income earners who undervalue or miscalculate the withholding tax that should be paid by them may have to pay penalty.