Withholding

Whether you are paid by the hour or by salary, you are aware that you will not be able to bring your entire wages home. All workers have tax responsibilities to fulfill. 

What is the meaning of “withholding”? 

When we say withholding, this is the part of the wages of employees that are taken from their paycheck. The portion that is withheld is directed to federal, state, and local tax authorities. 

Why is it important?

Primarily, paying income tax is an obligation. Not only to the federal government but to the state too. If you wonder where the withheld taxes go, these are essential in funding the different government and state programs. Such programs are focused on health, education, and Social Security, and food, to name a few. 

This is why withholding is also a crucial responsibility of all individuals who earn a living. Employers are required by tax authorities to withhold a part of the wages of employees. Employers then remit the collection to the IRS. How does withholding relate to tax returns? Withholding decreases the amount due that individuals need to pay when they submit annual tax returns. 

The earned wages as well as the amounts withheld are reflected on the W-2 Form.

I am about to start as a new employee. What are my responsibilities concerning withholding? 

If you are a new employee who starts employment at a new place of work, you must fill out IRS Form W-4 which will be provided by your new employer. Called the “Employee’s Withholding Certificate,” Form W-4 is used by employees to inform their employers about how much federal tax to withhold from their paycheck. Form W-4 has several parts that ask for key pieces of information about the employee. These include filing status, marital status, the number of jobs that the individual has, and dependents. As an employee, it is your responsibility to ensure the accuracy of your information. This will lead to a more accurate withholding.

Accuracy of withholding is important because withholding less than what is due will result in the employee owing penalties, interest, and more taxes after filing their annual return. In contract, withholding more than what is needed, the employee will be granted a tax refund by the IRS. 

For individuals who are non-residents and are involved in a trade or business in the U.S., they are required to fill out Form 1040NR. Non-residents are those individuals who are not U.S. born and do not meet the requirements in the green card test or substantial presence test to be deemed a resident for tax purposes.

Is federal withholding the same as state withholding? 

Although the principle behind federal withholding and state withholding is similar, the two are essentially different from each other. Federal withholding is the amount that individuals are made to pay to the federal government. How is federal withholding determined? It is based on various factors of the taxpayer’s personal and financial situation. Filing status, income adjustments, number of dependents are some examples. Aside from income taxes, withholding for Social Security and Medicare, collectively known as FICA taxes, are also automatically withheld from employees’ paycheck. 

On the other hand, state withholding is required by the state where the taxpayer is. However, keep in mind that one of the key differences between federal and state withholding is that federal withholding is legally mandated and so its guidelines are uniform for all workers. When it comes to state withholding, the guidelines, and rules surrounding it vary and are different from state to state. For example, many states have state tax withholding but others do not. 

If you are an employer or employee, check with your state’s laws regarding withholding. Being knowledgeable about these things is always an advantage.