Withholding tax

A withholding tax is a government-required deduction from salaries, wages, and dividends for an individual's income tax liability. The amount withheld is then credited against the individual's income tax liability. This approach is used by governments in order to assure tax collections and accelerate the receipt of taxes.

This tax is deducted at the point when funds are to be disbursed to an individual. The entity deducting the withholding tax forwards it to the applicable government entity within a prescribed period of time. The withholding entity records the amount of this tax in its balance sheet as a liability as soon as it is withheld, and clears the liability when it is paid to the government.

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