A withholding is that portion of an employee's gross pay that is not actually paid to the employee. Instead, the funds are remitted to a third party. The withholding concept is a crucial one for taxing authorities, which rely upon it to obtain the bulk of their income tax remittances. The withholding concept is used for both state income taxes and federal income taxes, except in those states that do not have a state income tax. The amount withheld from employee pay depends upon a number of factors, including the following:
- Income level. The tax rate increases as income increases, so the proportion withheld will increase for larger gross pay amounts.
- Marital status. The amount withheld varies, depending on whether an individual is filing taxes as a single or married person.
- Exemptions. An individual can claim any number of exemptions on the Form W-4, which alters the amount withheld.
If too much money is withheld from an employee's gross pay, it can be claimed as a refund as part of the year-end tax return filing process.
A self-employed individual does not engage in withholding activities. Instead, he or she remits an estimated income tax payment to the government on a quarterly basis.