Withholding (Tax)
Withholding is the portion of an employee's wages that an employer deducts and remits directly to the IRS as prepayment of income tax. Form W-4 determines the withholding amount. Withholding is treated as paid evenly throughout the year.
Exam Tip
Withholding = treated as paid evenly throughout year (key advantage over estimated payments). W-4 determines amount. Backup withholding = 24%. Can adjust anytime.
What is Tax Withholding?
Employers are required to withhold federal income tax, Social Security, and Medicare taxes from employee wages based on Form W-4 elections.
Types of Withholding
| Type | Rate/Basis |
|---|---|
| Federal income tax | Based on W-4 elections |
| Social Security | 6.2% up to wage base ($176,100 in 2025) |
| Medicare | 1.45% (+ 0.9% above $200K) |
| State income tax | Varies by state |
Other Income Subject to Withholding
| Income Type | Default Rate |
|---|---|
| Pensions/annuities | Based on W-4P elections |
| Gambling winnings | 24% (above thresholds) |
| Backup withholding | 24% (no TIN provided) |
| Nonresident aliens | 30% (or treaty rate) |
Key Rule: Even Distribution
Withholding is treated as paid evenly throughout the year, even if withheld unevenly. This can help avoid underpayment penalties late in the year by increasing withholding.
Exam Alert
Withholding is treated as paid evenly throughout the year (unlike estimated payments which are per quarter). Taxpayers can adjust W-4 anytime to increase withholding and avoid underpayment penalties. Backup withholding = 24%.
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Related Terms
Form W-2 (Wage and Tax Statement)
Form W-2 is the annual wage and tax statement that employers must provide to employees by January 31. It reports wages, tips, federal/state/local taxes withheld, Social Security and Medicare wages, retirement plan contributions, and health insurance costs.
Underpayment Penalty (Estimated Tax)
The underpayment penalty applies when a taxpayer does not pay enough tax through withholding or estimated payments during the year. Safe harbors: pay 100% of prior year tax (110% if AGI exceeds $150,000) or 90% of current year tax.
Estimated Tax Payments
Estimated tax payments are quarterly tax payments made by individuals and businesses who expect to owe $1,000 or more in tax after subtracting withholding and credits.
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