Withholding
Also called tax withholding, payroll withholding
Income tax an employer takes out of each paycheck and sends to the government in advance, based on the employee’s Form W-4.
What it means
Withholding is the pay-as-you-go system for income tax. Employers estimate each worker’s tax using the information on Form W-4 and send it to the IRS, and to the state where applicable. Social Security and Medicare taxes are also withheld. Withholding can also apply to pensions, retirement withdrawals, bonuses and some other payments.
At filing time, the total withheld is compared with the actual tax owed. Too much withheld produces a refund; too little means a balance due, and possibly an underpayment penalty. People with self-employment or investment income often make quarterly estimated payments instead of, or in addition to, withholding.
Example
For example, suppose $200 of federal income tax is withheld from each of 26 biweekly paychecks, totaling $5,200. If the person’s actual tax for the year is $4,800, they receive a $400 refund.
How it’s used
- Starting a new job and filling out a W-4
- Adjusting for a second job, marriage or a new child
- Avoiding a large bill or refund at tax time
Good to know
- A large refund means money was lent to the government interest-free; a large bill may signal the W-4 needs updating.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.