What is withholding tax (with pictures) origin electricity account

A withholding tax is an amount of money deducted straight from money you’d normally be paid, most often by employers, but occasionally by financial institutions, or if you’re lucky enough, from a large jackpot in a lottery. For the basic paycheck, the employer uses the withholding tax to pay taxes to a government. In the US, this can mean employers withhold taxes to pay the Internal Revenue Service, and in states where there is a tax on income, employers may also use a withholding tax to pay state taxes. Money is additionally withheld to make contributions to Social Security.

In the US, both federal and state withholding tax tends to be determined by two factors: the amount of income you make and the number of exemptions you take. If people don’t feel their year’s salary is going to require them to pay much in tax, particularly if their income falls below the poverty level, they may claim the maximum number of exemptions in order to reduce amounts taken from their paycheck. This way they have access to the majority of their money immediately, rather than having to wait until the end of the year to claim a refund on taxes paid.

Alternately people may raise their exemption number if they have new dependents to support, or if a spouse loses a job. On the other hand, taking too many exemptions can mean that when you file your taxes at the end of the year, you’ll end up owing the government money. Though you often are allowed to take as many exemptions as you’d like, this isn’t always prudent. For instance, if one spouse works as a freelancer, and the other spouse works for a company, you may be able to offset some of the taxes owed by the freelancer (including social security income) by claiming a lower number of exemptions. More money will be withheld to pay taxes, but you could end up owing little to nothing in taxes on the freelancer spouse’s income at the end of the year.

Typically, contract workers and freelancers do not pay withholding tax. It’s their responsibility to claim their income at the end of the year and make the necessary payments. It makes sense to make an estimate of your taxes for the year and set aside that money to pay year-end taxes. The benefit to withholding your own taxes is that you can drop this money into a savings account and earn a little interest. Others file a quarterly tax report and prepay taxes in order to make sure they aren’t hit with a huge payment request at the end of the year.

For guidelines on how many exemptions you should claim to pay the appropriate withholding tax, your best bet in the US is either to speak to a well-informed payroll employee or your human resources department. You can also call the Internal Revenue Service or your state tax board to estimate the best number of exemptions to claim or to arrange for making advance tax payments if you freelance. Remember that everything changes if your salary increases. Always check back with any of the above-mentioned sources to see if you should change your exemptions. Many employers allow you to change exemptions at any time, or on a monthly basis.