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Understanding tax withholding

On Behalf of | Aug 6, 2021 | Tax Law |

Tax withholding is an obligation for employers to collect taxes from an employee’s paycheck before the money is paid out to the IRS. Therefore, it is an essential aspect for any business owner to understand the tax withholding process.

Why is tax withholding important?

As employers are required to withhold taxes from an employee’s paycheck regularly, many people have taxes withheld at their jobs first before they file their income taxes at the end of each year. This way, it is easier to prepare your return and accurately determines how much you owe or whether you will receive a refund for all or some of the withheld money.

When your employer might not withhold all your taxes

There are instances where your employer might not withhold taxes from your paycheck and therefore, it is vital to know if this applies to you and how much tax withholding should occur.

One example is when you work as an independent contractor for multiple employers for one year. Your employer might not withhold any taxes from your paycheck if you work for multiple employers. Therefore, you would be responsible for ensuring that all these taxes are included in your Form 1099-MISC.

Who is responsible for tax withholding?

The person who is responsible for tax withholding will depend on the type of business that you have. If your business operates as a sole proprietorship, then you are responsible for tax withholding. If you operate as a partnership, then the person in charge of paying your employees will be responsible for this task. If it’s a company, then the CFO is responsible. It is important to note that you will be responsible for paying the difference if you do not withhold enough taxes.

How is tax withholding determined?

Tax withholding is based on the amount of income that you earn and how much tax you owe. The tax rates also depend on whether they are married and if their children will be claimed as a dependent. Tax withholding also applies to other types of income such as gambling winnings, pensions, retirement distributions, commissions, or even unemployment benefits.

How do you avoid tax penalties?

Even though it’s the responsibility of your employer to undertake tax withholding, you should exercise oversight in the process. Ensure your employer properly withholds taxes from your paychecks regularly.

Additionally, make sure all forms filed with the IRS are filled out correctly and accurately to avoid paying too much or too little in taxes owed at the end of each year.