You may have heard of the term withheld tax, primarily if you are an employee of a corporation that withholds a certain amount of your salary for paying taxes. It is good to know the right amount of taxes to be withheld and the regulations associated with withholding tax.
What is Withholding Tax
Withholding tax is a method of collecting taxes from an individual’s income on a regular basis. The employer is responsible for withholding tax from paychecks and remitting it to the government on behalf of the employee. Withholding tax helps in ensuring that the employee pays the proper amount of tax owed throughout the year.
How it works
Your employer would remit to the government a portion of your income that falls under the tax bracket. The amount of tax withheld is based on your W-4 form. This provides information on your tax filing status, exemptions and other relevant information. These details help determine the employee’s tax liability and calculate the tax from each paycheck.
This withheld tax comes as a huge relief towards the end of the year.
Who should pay it
All employees who receive a salary or wage income pay withholding tax. The tax is withheld from their pay and remitted to the government on their behalf. Self-employed individuals are also responsible for paying withholding tax, but they do so through estimated tax payments.
Types of Withholding Tax
Withholding tax can be classified based on job type, associated medicare plans and income taxed as per the state government or local taxation policy. Some types of withholding tax include:
- Federal Income Tax: It is a tax on an individual’s taxable income. This is their total income minus any adjustments, deductions and exemptions. The employee’s taxable income and tax bracket help determine the amount of federal income tax.
- Social Security Tax: This tax funds the Social Security program, which provides benefits to retirees, disabled individuals and surviving dependents. It is a percentage of the employee’s taxable income, up to a certain limit.
- Medicare Tax: This funds the Medicare program, which provides health insurance coverage to eligible individuals. It is a percentage of the employee’s taxable income, with no limit.
- State Income Tax: This is a tax on an individual’s taxable income, which is their total income minus any adjustments, deductions, and exemptions. The employee’s taxable income and the tax rate for their state of residence help find the amount of state income tax.
- City or Local Income Tax: It is a tax on an individual’s taxable income, which is their total income minus any adjustments, deductions and exemptions. The employee’s taxable income and the tax rate for their city or local jurisdiction help determine this.
How to Calculate Withholding Tax
The calculation is based on your W-4 form and the IRS Circular E, which provides information on the tax tables used to calculate this. The employer uses the information on the W-4 form and the tax tables to determine your tax liability and calculates the amount of tax from each paycheck.
This amount can be adjusted at any time. All you need to do is download the W-4 form from the IRS site, fill it and submit it to the HR team.
Is it a Good Idea to Withhold Your Tax?
Withholding tax is a convenient and easy way to pay your tax bill throughout the year. The tax is withheld from your pay and remitted to the government on your behalf. This is so you do not worry about estimated payments or paying a large tax bill at the end of the year.
But keep a thorough check on your withheld tax amount. If you have any child tax credit, have worked on a seasonal job or were not working for some part of the year, you should check the tax bracket you fall under. You can check your tax amount using the IRS tax withholding estimator as well.
Withholding tax could be a boon to those who end up paying hefty taxes at the end of the year.