Withholding

Withholding is a portion of an employee's wages or salary withheld by the employer as partial payment of the employee's income tax. It is also called withholding tax. Usually the withholding tax applies to employment income. Withholding tax is also required on payments of interest or dividends. The additional withholding tax obligations arise if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments use it as a means to combat tax evasion, and sometimes impose additional withholding tax requirements if the recipient has been delinquent in filing tax returns or in industries where tax evasion is perceived to be common.

It is treated as a payment on the recipient's final tax liability. It may be refunded if it is determined, when a tax return is filed, that the recipient's tax liability to the government which received the withholding tax is less than the tax withheld, or additional tax may be due if it is determined that the recipient's tax liability is more than the withholding tax. The amount of withholding tax on income payments is usually a fixed percentage except for employee income. In the case of employment income the amount of withholding tax is usually based on an estimate of the employee's final tax liability.

The withholding calculator helps in calculating the amount to be withheld. Kiplinger introduced the Withholding calculator which helps in making complicated calculations easy. It is also easy to use. The calculated amount would be almost like last year unless a major financial change took place. Usually contract workers and freelancers do no pay withholding tax. They claim their income at the end of the year and make the necessary payments. The benefit of withholding one’s own taxes is that it can be put into savings account and can earn a little interest.

Questions

• What is withholding?
• How is it treated and how is it useful?