Tax withholding is the practice of an organization keeping part of compensation owed to an individual to cover part of the taxes on the income. Both the Federal government and states may have withholding systems in place for specific types of taxes. The most common tax withholding is on income from an employer to employee; the employer withholds a certain amount of income taxes which goes against the overall income taxes owed by the employee at the end of the tax year. The employer will keep all the withheld taxes in an account which is periodically paid to the Internal Revenue Service (IRS). There are other tax withholdings such as payments to individuals or entities in other countries which ensures proper payment to the IRS. Tax withholdings may apply to payments other than wages such as dividends or interest in certain situations.
To calculate personal or business tax withholdings, click here.
[Last updated in October of 2021 by the Wex Definitions Team]