Definition

1. Noun:
   • A tax on income that is deducted at the source: A "withholding tax" is an amount of money, specifically an income tax, that an employer is required to subtract directly from an employee's wages or salary. This deducted amount is then sent by the employer to the government tax authority on the employee's behalf.

Usage

• The primary function of a "withholding tax" is to collect income tax revenue gradually throughout the year, rather than requiring the employee to pay a large lump sum later. It acts as a prepayment of the employee's annual income tax liability.
• This term is most commonly used in the context of employment and payroll. The employer is the entity responsible for the "withholding" action.

Examples

• Noun:
  • Your take-home pay is lower because your employer deducts a withholding tax.
  • The company's accounting department is responsible for calculating and remitting the withholding tax to the federal government.
  • Freelancers often do not have withholding tax taken from their payments, so they must make estimated tax payments themselves.

Advanced Usage

• "Backup withholding": A specific type of withholding tax applied at a higher rate to certain payments (like interest or dividends) if a payee fails to provide a correct taxpayer identification number to the payer.
  • The bank initiated backup withholding on the investment income because the account holder's tax ID was invalid.

Variants and Related Words

• Withhold (verb): To hold back or deduct. This is the action from which the noun "withholding tax" is derived.
  • The employer must withhold the correct amount of tax from each paycheck.
• Tax withholding (noun phrase): A synonymous phrase for the general concept or system of deducting taxes at source.
  • Understanding your tax withholding is key to avoiding a surprise bill at tax time.

Synonyms

• Pay-as-you-earn tax (PAYE): A term used in some countries, like the UK, for a similar system of income tax collection at source.
• Source deduction: A general term describing the process of deducting tax at the point where income is paid.

Related Phrases

• Withholding allowance: A claim on Form W-4 (in the US) that an employee files with their employer to adjust the amount of income tax withheld from their pay, based on their personal tax situation.
  • Claiming more withholding allowances on your W-4 will result in less tax being taken from your paycheck.
• Withholding statement (Form W-2): The document an employer provides to an employee and the government, summarizing the employee's annual earnings and the amount of tax withheld.
  • You need your W-2 withholding statement to file your annual income tax return.

Noun

1. income tax withheld from employees' wages and paid directly to the government by the employer