Withholding tax may sound like a new notion, but you’ve probably already dealt with it: As the name implies, it is a sum of money deducted from most employees’ income. The most crucial thing is to ensure that you are withdrawing the correct amount.
The term “withholding tax” refers to the money deducted by an employer from an employee’s gross wages and paid directly to the government. The amount withheld is applied as a credit against the employee’s annual income tax liability.
The great majority of employees in the United States are subject to tax withholding. Nonresident aliens are also liable to withhold taxes on earned income and other income, such as interest and dividends from the securities of U.S. companies that they own.
Tax withholding is a way for the U.S. government to maintain its pay-as-you-go (or pay-as-you-earn) income tax system. This means taxing individuals at the source of income rather than trying to collect income tax after wages are earned.
Here’s How It Works
Whenever an employee gets paid, their employer withholds a certain percentage of their paycheck as income tax. This is then paid by the employer to the Internal Revenue Service (IRS).
The amount deducted appears on the employee’s paystub and the total amount deducted annually can be found on Form W-2: Wage and Tax Statement. Employers send W-2s to their employees each year to help them file their annual income tax returns.
The amount deducted depends on a number of factors. These considerations include the amount an employee earns, filing status, any withholding allowances claimed by the employee, and whether an employee requests that additional income be withheld. If merited, any excess is paid back to the employee by the IRS as a tax refund.
The majority of U.S. states also have state income taxes and employ tax withholding systems to collect taxes from their residents. States use a combination of the IRS W-4 Form and their own worksheets, which residents fill out to establish their withholding.
Nine states do not impose income tax on residents. They are: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Withholding tax only applies to capital gains for high-earners living in Washington.
New Hampshire residents pay tax on interest and dividend income only.2 However, they voted to gradually phase out this practice by 2027.
History of Withholding Taxes
Tax withholding first occurred in the U.S. in 1862 at the order of President Abraham Lincoln to help finance the Civil War. The federal government also implemented excise taxes for the same purpose. Tax withholding and income tax were abolished after the Civil War in 1872.
The current system was accompanied by a large tax hike when it was implemented in 1943.5 At the time, it was thought that it would be difficult to collect taxes without getting them from the source. Most employees are subject to withholding taxes when they are hired and fill out a W-4 Form. The form estimates the amount of taxes that will be due.
The withholding tax is one of two types of payroll taxes. The other type is paid to the government by the employer and is based on an individual employee’s wages. This money contributes to funding for Social Security and federal unemployment programs (since the Social Security Act of 1935) as well as Medicare (since 1966).
Types of Withholding Taxes
There are two main types of withholding tax employed by the IRS to ensure that proper tax is withheld in different situations: the U.S. resident and nonresident withholding tax.
U.S. Resident Withholding Tax
The first and more commonly discussed withholding tax is the one on U.S. residents’ personal income, which every employer in the U.S. must collect. Under the current system, employers collect the withholding tax and remit it directly to the government, with employees paying the remainder of what they may owe when they file a tax return in April each year.
If too much tax is withheld, the result is a tax refund. However, if not enough tax has been held back, then the individual will owe money to the IRS.
Generally, you want about 90% of your estimated income taxes withheld and sent to the government. This ensures that you never fall behind on income taxes (something that can result in heavy penalties) and that you are not overtaxed throughout the year.
Investors and independent contractors are exempt from withholding taxes but are required to pay quarterly estimated tax. If these classes of taxpayers fall behind, they can become liable to backup withholding, which is a higher rate of tax withholding set at 24%.
You can easily perform a paycheck checkup using the IRS’s tax withholding estimator. This tool helps identify the correct amount of tax withheld from each paycheck to make sure that you don’t owe more when you file your annual return.
To use the estimator, you’ll need your most recent pay stubs, your most recent income tax return, your estimated income during the current year, and other information.
Nonresident Withholding Tax
The other type of withholding tax is levied against nonresident aliens to ensure that proper taxes are paid on income sources from within the U.S. A nonresident alien is someone who is foreign-born and has not passed the green card test or a substantial presence test.
Read Also: Do 100% Disabled Veterans Pay Capital Gains Tax?
All nonresident aliens must file Form 1040NR if they are engaged in a trade or business in the U.S. during the year. If you are a nonresident alien, there are standard IRS deduction and exemption tables to help you figure out when you should be paying U.S. taxes and which deductions you may be able to claim.
If there is a tax treaty between your country and the United States, that can also affect withholding tax.
Here’s a breakdown of the taxes that might come out of your paycheck. Some taxes, like your federal, state, local and FICA taxes, will be withheld from your paycheck by your employer. A few others, like FUTA and SUTA, are your employer’s responsibility and not withheld.
- Federal income tax. This is income tax your employer withholds from your pay and sends to the IRS on your behalf. The amount largely depends on what you put on your W-4.
- State tax: This is state income tax withheld from your pay and sent to the state by your employer on your behalf. The amount depends on where you work, where you live and other factors, such as your W-4 (and some states don’t have an income tax).
- Local income or wage tax: Your city or county may also have an income tax. This money might go toward such expenses as the bus system or emergency services.
- Social Security tax: Frequently labeled as OASDI (it stands for old-age, survivors and disability insurance), this tax typically is withheld on the first $160,200 in 2023 at a rate of 6.2%. For 2024, the tax will be withheld on the first $168,600. Paying this tax is how you earn credits for Social Security benefits later.
- Medicare tax: Sometimes referred to as the “hospital insurance tax,” this pays for health insurance for people who are 65 or older, younger people with disabilities and people with certain conditions. It is a tax of 1.45% on your earnings, and employers typically have to withhold an extra 0.9% on money you earn over $200,000.
- FUTA tax: This stands for Federal Unemployment Tax Act. The tax funds a federal program that provides unemployment benefits to people who lose their jobs. Employees do not pay this tax or have it withheld from their pay. Employers pay it.
- SUTA tax: The same general idea as FUTA, but the money funds a state program. Employers pay the tax.
| Tax | Employee pays | Employer pays |
|---|---|---|
| Federal income tax | Employee pays. | |
| State tax, local income or wage tax | Depends on location. | Depends on location. |
| Social Security tax (aka OASDI) | 6.2%(only the first $147,000 of earnings in 2022; $160,200 in 2023). | 6.2%(only the first $160,200 of earnings in 2023;$168,600 in 2024). |
| Medicare tax | 1.45%. | 1.45%. |
| Additional Medicare tax | 0.9% (on earnings over $200,000 for single filers; $250,000 for joint filers). | |
| Federal unemployment tax (FUTA) | Employer pays. | |
| State unemployment tax (SUTA) | Employer pays. |
How Withholding Taxes are Calculated
The amount of federal and state tax your employer withholds from your check largely depends on what you put on your Form W-4, which you probably filled out when you started your job. Here are some things to know:
- Form W-4 asks about your marital status, dependents and other factors to help you calculate how much to withhold. The less you withhold, the less tax comes out of your paycheck.
- What you put on your W-4 then gets funneled through something called withholding tables, which your employer’s payroll department uses to calculate exactly how much federal and state income tax to withhold.
- You can change your W-4 at any time. Just download a blank one from the IRS website, fill it out and give it to your human resources or payroll team.
The IRS updates marginal tax rates annually. The rates for tax year 2024 are highlighted in the table below:
| Marginal Tax Rates for 2024 | ||
|---|---|---|
| Tax Rate | Income Range Single, Married Filing Separately | Income Range Married Filing Jointly |
| 10% | $11,600 or less | $23,200 or less |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 |
| 37% | More than $609,350 | More than $731,200 |
Source: Internal Revenue Service
You can calculate your withholding tax by using the IRS Withholding Estimator. In order to get an accurate figure, you’ll need some basic information. Be sure to have the following handy when you’re filling out the online form:
- Your filing status
- Your income source
- Any additional income sources
- The end date of your most recent pay period
- Your wages per period and the year-to-date (YTD) totals
- The amount of federal income tax per pay period and the total paid year-to-date
- Whether you take the standard deduction or itemize your deductions
- The amount of any tax credits you take
The estimator tells you how much of a refund or tax bill you can expect. You can also choose an estimated withholding amount that’s suitable for you.
The IRS recommends checking your withholding for lots of reasons, including if you work a seasonal job, claim the child tax credit or had a large refund or tax bill last year.
To see whether you may need to change your withholding, you can use the IRS’ Tax Withholding Estimator. Before you get started, have the following information ready for yourself (and your spouse, if you’re married): your most recent pay stubs, information about other sources of income and your most recent income tax returns. You can also use our W-4 calculator to get a general sense of whether you’re on track with your tax withholding.
If you need to change your withholdings, the process is fairly straightforward: Just fill out a new W-4 and submit it to your employer. Withholding tax comes out of your paycheck throughout the year, so it’s better to make changes to your withholding sooner rather than later.
Which Countries Have Withholding Taxes?
| Country | Last | Previous | Reference | Unit |
|---|---|---|---|---|
| Albania | 15 | 15 | Dec/24 | % |
| Andorra | 0 | 0 | Dec/24 | % |
| Angola | 15 | 15 | Dec/24 | % |
| Argentina | 35 | 35 | Dec/24 | % |
| Armenia | 10 | 10 | Dec/24 | % |
| Aruba | 0 | 0 | Dec/24 | % |
| Australia | 10 | 10 | Dec/24 | % |
| Austria | 0 | 0 | Dec/24 | % |
| Bahamas | 0 | 0 | Dec/24 | % |
| Bahrain | 0 | 0 | Dec/24 | % |
| Barbados | 0 | 0 | Dec/24 | % |
| Belgium | 30 | 30 | Dec/24 | % |
| Belize | 15 | 15 | Dec/24 | % |
| Bermuda | 0 | 0 | Dec/24 | % |
| Bosnia and Herzegovina | 10 | 10 | Dec/24 | % |
| Botswana | 15 | 15 | Dec/24 | % |
| Brazil | 15 | 15 | Dec/24 | % |
| Brunei | 2.5 | 2.5 | Dec/24 | % |
| Bulgaria | 10 | 10 | Dec/24 | % |
| Burkina Faso | 12.5 | 12.5 | Dec/24 | % |
| Canada | 25 | 25 | Dec/24 | % |
| Cayman Islands | 0 | 0 | Dec/24 | % |
| Chile | 35 | 35 | Dec/24 | % |
| China | 10 | 10 | Dec/24 | % |
| Colombia | 20 | 20 | Dec/24 | % |
| Congo | 20 | 20 | Dec/24 | % |
| Costa Rica | 15 | 15 | Dec/24 | % |
| Croatia | 15 | 15 | Dec/24 | % |
| Cyprus | 0 | 0 | Dec/24 | % |
| Czech Republic | 35 | 35 | Dec/24 | % |
| Denmark | 22 | 22 | Dec/24 | % |
| Dominica | 15 | 15 | Dec/24 | % |
| Egypt | 20 | 20 | Dec/24 | % |
| Estonia | 0 | 0 | Dec/24 | % |
| Finland | 0 | 0 | Dec/24 | % |
| France | 0 | 0 | Dec/24 | % |
| Gabon | 20 | 20 | Dec/24 | % |
| Georgia | 5 | 5 | Dec/24 | % |
| Germany | 0 | 0 | Dec/24 | % |
| Greece | 15 | 15 | Dec/24 | % |
| Greenland | 0 | 0 | Dec/24 | % |
| Grenada | 15 | 15 | Dec/24 | % |
| Hong Kong | 0 | 0 | Dec/24 | % |
| Hungary | 0 | 0 | Dec/24 | % |
| Iceland | 13 | 12 | Dec/24 | % |
| India | 20 | 20 | Dec/24 | % |
| Indonesia | 20 | 20 | Dec/24 | % |
| Ireland | 20 | 20 | Dec/24 | % |
| Israel | 23 | 23 | Dec/24 | % |
| Italy | 26 | 26 | Dec/24 | % |
| Ivory Coast | 18 | 18 | Dec/24 | % |
| Jamaica | 33.33 | 33.3 | Dec/24 | % |
| Japan | 20 | 20 | Dec/24 | % |
| Kenya | 25 | 25 | Dec/24 | % |
| Latvia | 0 | 0 | Dec/24 | % |
| Liberia | 15 | 15 | Dec/24 | % |
| Liechtenstein | 0 | 0 | Dec/24 | % |
| Lithuania | 10 | 10 | Dec/24 | % |
| Luxembourg | 0 | 0 | Dec/24 | % |
| Macau | 0 | 0 | Dec/24 | % |
| Macedonia | 10 | 10 | Dec/24 | % |
| Malaysia | 15 | 15 | Dec/24 | % |
| Maldives | 10 | 10 | Dec/24 | % |
| Malta | 0 | 0 | Dec/24 | % |
| Mauritius | 15 | 15 | Dec/24 | % |
| Mexico | 35 | 35 | Dec/24 | % |
| Monaco | 0 | 0 | Dec/24 | % |
| Namibia | 10 | 10 | Dec/24 | % |
| Netherlands | 0 | 0 | Dec/24 | % |
| New Zealand | 15 | 15 | Dec/24 | % |
| Nigeria | 10 | 10 | Dec/24 | % |
| Norway | 15 | 15 | Dec/24 | % |
| Oman | 10 | 10 | Dec/24 | % |
| Panama | 12.5 | 12.5 | Dec/24 | % |
| Papua New Guinea | 15 | 15 | Dec/24 | % |
| Paraguay | 15 | 15 | Dec/24 | % |
| Peru | 30 | 30 | Dec/24 | % |
| Poland | 20 | 20 | Dec/24 | % |
| Portugal | 25 | 25 | Dec/24 | % |
| Romania | 16 | 16 | Dec/24 | % |
| San Marino | 13 | 13 | Dec/24 | % |
| Saudi Arabia | 15 | 15 | Dec/24 | % |
| Senegal | 16 | 16 | Dec/24 | % |
| Serbia | 20 | 20 | Dec/24 | % |
| Seychelles | 15 | 15 | Dec/24 | % |
| Singapore | 15 | 15 | Dec/24 | % |
| Slovakia | 35 | 35 | Dec/24 | % |
| Slovenia | 15 | 15 | Dec/24 | % |
| South Africa | 15 | 15 | Dec/24 | % |
| South Korea | 20 | 20 | Dec/24 | % |
| Spain | 19 | 19 | Dec/24 | % |
| St Lucia | 15 | 15 | Dec/24 | % |
| St Vincent and the Grenadines | 15 | 15 | Dec/24 | % |
| Swaziland | 10 | 10 | Dec/24 | % |
| Sweden | 0 | 0 | Dec/24 | % |
| Switzerland | 35 | 35 | Dec/24 | % |
| Thailand | 15 | 15 | Dec/24 | % |
| Turkey | 20 | 20 | Dec/24 | % |
| Ukraine | 15 | 15 | Dec/24 | % |
| United Kingdom | 20 | 20 | Dec/24 | % |
| United States | 30 | 30 | Dec/24 | % |
Withholding tax is the amount of money that your employer holds back from your paycheck and sends to the government as payment toward your income taxes. Anyone who earns income is responsible for paying income tax.
You could get a tax refund after filing your taxes, or you may owe more money. Part of your tax bill depends on your withholding tax.
If you find that you end up paying more money on tax filing day, you can lower that amount by requesting that additional money be held from your paycheck. On the other hand, having a smaller amount deducted from every paycheck may make it easier to satisfy your tax bill at the end of the year.
