DEFINITION of 'Withholding'

The portion of an employee's wages that is not included in his or her paycheck because it is remitted directly to the federal, state and local tax authorities. Withholding reduces the amount of tax employees must pay when they submit their annual tax returns. The amount withheld is based on the employee's income, marital status, number of dependents and number of jobs. When too much money is withheld, it is returned to the employee as a tax refund.

BREAKING DOWN 'Withholding'

In the U.S., the tax authorities require employers to withhold tax from their employees' paychecks because the income tax must be paid throughout the year as income is earned. As an employee, it cannot be paid in one lump sum at the end of the year. Workers who don't pay enough tax on income as it is earned are subject to penalties and interest. Workers who are self-employed aren't subject to withholding, but must make quarterly estimated tax payments instead.

  1. Withholding Allowance

    An allowance an individual claims on a W-4 Form. A withholding ...
  2. W-4 Form

    A form completed by an employee to indicate his or her tax situation ...
  3. Excess Employer Withholding

    When one or more employers withhold more than the aggregate maximum ...
  4. Wage Assignment

    The procedure of taking money directly from an employee's compensation ...
  5. Garnishment

    A legal process whereby payments towards a debt owed by an individual ...
  6. Withholding Tax

    1. Income tax withheld from employees' wages and paid directly ...
Related Articles
  1. Taxes

    5 Smart Ways To Use Your Tax Return

    This year, find out how to stretch your tax refund further to strengthen your future.
  2. Taxes

    3 Common Tax Questions Answered

    We clarify some rules that often puzzle taxpayers.
  3. Professionals

    4 Ways Companies Can Relieve Workplace Stress

    Workplace stress can cost companies tons of money in lost productivity and absenteeism. Some of that is out of their control, but often they are the cause.
  4. Professionals

    Prevent Employees From Hacking You Computer System

    Cyber security attacks from a current or ex-employee can cause a lot of pain. Here is how to avoid such attacks.
  5. Entrepreneurship

    Hire Your Kids at Your Small Business – Here's Why

    And how to make sure you do it the right way, following IRS guidelines.
  6. Economics

    Explaining Silo Mentality

    A silo mentality occurs when certain departments in an organization do not share information or knowledge with other departments.
  7. Entrepreneurship

    What Does It Mean To Be Self-Employed?

    A self-employed individual works for herself instead of working for an employer that pays a salary or hourly wage.
  8. Savings

    5 Ways To Be Irreplaceable At Work

    Companies most value five certain behaviors, and the employees who exhibit them establish themselves as essential to an organization.
  9. Economics

    What is a Restricted Stock Unit (RSU)?

    RSUs are compensation in the form of stocks that an employer pays an employee according to a vesting schedule.
  10. Professionals

    How To Keep Millennials Motivated in the Workplace

    Millennials, ages 18 to 34, will soon make up most of the global workforce. What are the best ways to maximize their potential for top performance?
  1. What is IRS Form W-2 used for?

    Any employer who pays an employee $600 or more for the year, including noncash forms of remuneration, must file a form W-2 ... Read Full Answer >>
  2. Do I still have to pay penalties and taxes on money that I don't roll over from a ...

    It depends. Let's address the two penalties that will apply - the 10% early-withdrawal penalty and the 20% federal withholding ... Read Full Answer >>
  3. Are the deferred earnings in a SIMPLE IRA subject to FICA taxes?

    While salary deferral contributions to a savings incentive match plan for employees of small employers (SIMPLE) IRAs and ... Read Full Answer >>
  4. What protections are in place for a whistleblower?

    Whistleblowers can play a critical role in ensuring the compliance, safety, honesty and legal fairness of governments and ... Read Full Answer >>
  5. How do modern companies assess business risk?

    Before a business can assess or mitigate business risk, it must first identify probable or likely risks to its bottom line. ... Read Full Answer >>
  6. Why has emphasis on corporate governance grown in the 21st century?

    Corporate governance refers to operational practices, management protocols, and other governing rules or principles by which ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  3. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  5. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  6. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!