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Categories: General Tax Terms

Withholding Tax refers to the amount of an employee’s earnings that an employer deducts and remits to the government as part of the employee’s income tax obligation. This tax is typically based on the employee’s income level, filing status, and the number of allowances claimed on their W-4 form.

Withholding tax can also apply to other types of payments, including interest, dividends, and certain payments to non-residents. For example, a company may need to withhold tax from a contractor’s payment if they are located in a different country. The withheld amount serves as a prepayment of the individual’s annual tax liability, allowing the IRS or local tax authorities to collect tax revenue throughout the year rather than in a lump sum at year-end.

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