Withholding
The amount of federal and state income tax your employer deducts from each paycheck and sends to the IRS on your behalf throughout the year.
Tax withholding is the pay-as-you-go system the IRS uses to collect income taxes. Your employer withholds a portion of each paycheck based on the information you provide on Form W-4, including your filing status, dependents, and any additional withholding you request.
The goal of withholding is to match your total payments to your actual tax liability so you neither owe a large balance nor receive an oversized refund at filing time. If too little is withheld, you may owe penalties for underpayment. If too much is withheld, you are essentially giving the government an interest-free loan.
You can adjust your withholding at any time by submitting a new W-4 to your employer. Major life events — marriage, divorce, having a child, buying a home, or starting a side business — are good triggers to review your W-4. The IRS Tax Withholding Estimator is a helpful tool for calibrating your withholding.
Related Terms
W-2
A tax form employers send to employees each year reporting wages earned and taxes withheld, including federal income tax, Social Security, and Medicare.
Pay-As-You-Go (PAYG)
The US tax system requires taxes to be paid throughout the year as income is earned, either through employer withholding or quarterly estimated tax payments.
Tax Refund
Money returned to you by the IRS when your total tax payments (withholding + estimated payments + refundable credits) exceed your tax liability for the year.
Penalty
A charge imposed by the IRS for filing late, paying late, or underpaying estimated taxes. Common penalties include failure-to-file (5% per month) and failure-to-pay (0.5% per month).
Try the calculator
Use our free tool to calculate your withholding and see how it affects your taxes.