Tax withholding in the United States

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In the United States income tax system, employers are required to withhold a portion of each employee's income and pay it directly to the U.S. Internal Revenue Service. This withholding acts as a prepayment of tax they will owe at the end of the year, as well as a direct payment of certain other taxes.

Payors of amounts may be required to withhold income or other taxes from such amounts and pay the tax to the government making the requirement. In the U.S., the Federal and most state governments require such withholding for income and social insurance taxes.^[1]

Contents 1 History 2 Tax systems 2.1 Payroll tax 2.2 Income tax 3 Payment 4 See also 5 References 6 Extra Links

[edit] History

In the History of the U.S Tax System, the U.S. Department of Treasury describes tax withholding.

This greatly eased the collection of the tax for both the taxpayer and the Bureau of Internal Revenue. However, it also greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future.^[2]

[edit] Tax systems

[edit] Payroll tax

Social Security and medicare taxes are withheld from employers' payments of wages to employees at a flat rate, with a wage cap adjusted each year for inflation. Medicare tax is similarly withheld with no cap.^[3]

[edit] Income tax

Income tax must be withheld from payments of wages based on one of two methods: tables of withholdings, and the wage bracket method.^[4] Under each method, the tax to be withheld is calculated by first reducing taxable wages by an exemption allowance as claimed by the employee on the Form W-4 he or she submits to the employer.^[5] The exemption allowance claimed by the employee may include exemptions for dependents as well as exemptions equivalents for the tax effect of deductions and credits.^[6]

Income tax must also be withheld from many payments to foreign persons.^[7] The amount withheld is generally a flat 30% of the gross amount of the payment. Such rate may be reduced, even to zero, under income tax treaties between the U.S. and the payee's country of residence.^[8]

Income tax at a flat 10% is also required by payors of interest or dividends if the IRS has notified the payor of the requirement. These "backup withholding" provisions were designed to reduce tax evasion.^[9]

All withholding taxes are merely prepayments to be applied to the taxpayer's pocket for the year. All are refundable in the same manner as other payments (such as estimated tax payments) upon filing tax returns following year end.^[10]

[edit] Payment

Payment to the government is required for those withholding tax. Payment is due according to the aggregate amounts of all Federal taxes required to be paid by the withholding agent, including his/its own taxes. Payment may be required in as little as 3 business days. Payments aggregating $200,000 or more per year must be made by electronic funds transfer. Smaller payments are made by depositing the amounts in nearly any bank for the account of the U.S. government.^[11]

The amount of a person's federal income tax withholding depends on several factors such as:

• the taxpayer's marital status.
• the number of children or dependents the taxpayer has.
• whether or not the taxpayer is an employee IRC 3401.
• if the taxpayer wants to claim child tax credits.
• if the taxpayer holds two or more jobs.
• if the taxpayer plans to itemize.
• any tax exemptions from withholding that the taxpayer wants to claim.
• any additional amount the taxpayer wants to withhold.

A taxpayer will get a tax refund if the withholding for the year was greater than the income tax actually owed.

[edit] See also

• Form W-2
• Payroll tax
• United States
• PAYE
• Withholding tax
• Dividend tax
• Internal Revenue Code 3401
• Taxation in the United States
• US State NonResident Withholding Tax

[edit] References

1. ^ Federal rules for withholding tax from employees are explained in detail in IRS Publication 15. http://www.irs.gov/pub/irs-pdf/p15.pdf.
2. ^ "History of the U.S. Tax System". U.S. Department of Treasury. http://www.ustreas.gov/education/fact-sheets/taxes/ustax.shtml. Retrieved 2006-10-31. 
3. ^ In 2009, the rates are 6.2% and 1.9% of taxable wages, respectively, applicable to the first $102,000 for Social Security.
4. ^ See IRS Publication 15T for tables, at http://www.irs.gov/pub/irs-pdf/p15t.pdf.
5. ^ The employer is generally entitled to rely on the employee's representation unless the IRS has notified the employer to the contrary.
6. ^ See, e.g., the instructions for Form W-4 at http://www.irs.gov/pub/irs-pdf/fw4.pdf.
7. ^ 26 USC 1441.
8. ^ See, e.g., U.S./Canada income tax treaty at http://www.irs.gov/businesses/international/article/0,,id=169503,00.html.
9. ^ 26 USC 7205.
10. ^ 26 USC 31 and 33.
11. ^ (reference needed)

[edit] Extra Links

• US Individuals Tax Withholding