Overview Tax Withholding

Each time you receive a pay stub, you may notice that the amount you earn, and the amount you actually get paid are different. This is because every month, a percent of your paycheck goes to pay your federal income tax and social security taxes. This way, the government receives tax money throughout the year, and the taxpayer does not have to pay a huge lump sum when it comes time to file their taxes. Although you may be upset to see the difference between your wages earned and wages paid, tax withholding is actually for your convenience.

Federal tax withholding is the reason you often get a refund after filing your taxes. The amount withheld from each paycheck goes to pay your income tax bill, and is determined by how much federal tax you are estimated to have for that year. When it finally comes to filing your taxes, you will probably have more exemptions and deductions than expected, and thus pay less tax than estimated. This means that the amounts withheld were too high, and you paid too much tax for that year, so they give the extra amount back.

Withholding is not a tax by itself, just payments towards your final tax bill. The little bits taken throughout the year can add up to quite a lot by the time you have to pay taxes. Many people do not budget their money or keep track of their taxes enough to plan to save the money you would need if you paid your taxes all at once. Withholding is actually a great invention by the IRS that saves taxpayers from having to worry about saving this money, and allows the US government to receive a steady stream of tax payments throughout the year instead of all at once.

Employment taxes, or social security taxes, are the other part of withholding. These are taxes you pay now in order to receive social security income when you are retired or if you become disabled. Once again, withholding is for your convenience, because your employer deals with calculating this so that you don’t need to worry about it. It makes sense for your employer to take care of this, because they have to pay from their own money towards social security too, and the amount they pay is the same as the amount you pay.

The amount of your income withheld is determined for you, based on your past tax years. If you have made big changes in your life, such as moving, changing salary, getting married, or having a child, you can evaluate your own tax bill and adjust the amount withheld. It is important to you that an accurate amount is withheld, because too little will result in a large tax bill at the end of the year, and too much means you lose the use of that money until you get your refund.