Withholding

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.

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