A withholding tax is a deduction from pay, made by employers or financial institutions, to pay taxes to the government. In the US, tax withholding is based on income and exemptions, and can be adjusted to reduce or increase the amount withheld. Self-employed individuals are responsible for paying their own taxes. It’s important to seek guidance from payroll or tax authorities to determine the appropriate amount of exemptions to claim.
A withholding tax is an amount of money deducted directly from money you would normally be paid, most often by employers, but occasionally by financial institutions, or if you’re lucky, from a big lottery prize. For base pay, the employer uses tax withholding to pay taxes to a government. In the United States, this can mean that employers withhold taxes to pay the Internal Revenue Service, and in states where there is an income tax, employers can also use a withholding tax to pay state taxes. The money is additionally withheld for Social Security contributions.
In the United States, federal and state tax withholding tends to be determined by two factors: how much income you earn and how many exemptions you get. If people don’t feel that their year’s salary will require them to pay a lot in taxes, particularly if their income falls below the poverty level, they can claim the maximum number of exemptions to reduce the amounts taken from their paycheck. This way, they have access to most of their money right away, instead of having to wait until the end of the year to claim a refund of taxes paid.
Alternatively, people can increase their exemption number if they have new dependents to support or if a spouse loses a job. On the other hand, taking too many exemptions can mean that when you file your taxes at the end of the year, you’ll end up owing the government money. Although you are often allowed to take as many exemptions as you want, this is not always prudent. For example, if one spouse works as a freelancer and the other spouse works for a business, he or she can offset some of the taxes owed by the freelancer (including Social Security income) by claiming fewer exemptions. More money will be withheld to pay taxes, but you could end up owing little or nothing in tax on the independent spouse’s income at the end of the year.
Contract workers and the self-employed generally do not pay withholding. It is your responsibility to claim your income at the end of the year and make the necessary payments. It makes sense to estimate your taxes for the year and set aside that money to pay year-end taxes. The benefit of withholding your own taxes is that you can put this money in a savings account and earn a little interest. Others file a quarterly tax report and prepay the taxes to make sure they don’t get a big payment request at the end of the year.
For guidelines on how many exemptions you should claim to pay the appropriate tax withholding, your best bet in the US is to speak to a knowledgeable payroll clerk or your human resources department. You can also call the Internal Revenue Service or your state tax board to estimate the best amount of exemptions to claim or to make advance tax payments if you’re self-employed. Remember that everything changes if your salary increases. Always check with any of the sources listed above to see if you should change your exemptions. Many employers allow you to change exemptions at any time or on a monthly basis.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
