Definition
Tax withholding is the portion of income an employer or payer sends to the government on your behalf during the year.
How It Works
Employers withhold federal and state income tax, plus Social Security and Medicare, from each paycheck based on the employee's W-4 elections. The amount withheld is credited against the total tax owed at filing.
Example
An employee who under-withholds during the year faces a balance due and possibly an underpayment penalty at filing.
Who It Applies To
Employees, and anyone with withholding on pensions or certain payments.
Watch-Outs
Default withholding on bonuses and equity compensation is often lower than a high earner's true marginal rate, which creates surprise balances and penalties.
