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How does tax withholding work?

On Behalf of | Sep 14, 2021 | Tax Law |

In the United States, employers are required to withhold taxes from their employee’s paychecks. The withholding amount is automatically deducted by the employer from each paycheck and is determined by an employee’s wages and marital and family status.

However, many US-based employees have a flat withholding rate applied to their income without regard for other factors such as wages and marital status. To handle this, the IRS has published a withholding allowance calculator for employees and employers to use. This tool allows the employee or employer to determine how much should be withheld from their wages to avoid issues such as underpayment penalties.

What is the difference between voluntary and required withholding?

Voluntary withholding refers to when an individual withholds a certain amount from their paycheck in order to pay taxes. In contrast, required withholding is deducted automatically by the employer at no cost or effort on behalf of the individual.

Why should I care about payroll taxes?

Since payroll taxes are deducted automatically from each paycheck, it is essential to know about these deductions. This ensures that the correct amount of tax is being withheld.

If an employer inadvertently withholds more than necessary, they may owe a penalty for underpayment. Similarly, if an employee withholds too little, they may owe a penalty.

How do I know if my employer is withholding properly?

An employee can confirm that their employer is deducting the proper amounts by reviewing their payslip each payday. The IRS has a free tool to help employees review the tax withheld on each paycheck.

How do I calculate the amount of taxes that should be withheld?

The best way to determine how much tax will be withheld is to use the online IRS tool. This tool is specifically designed for individuals to determine how much tax should be withheld given their marital status and wages.

To use the tool, a person must know their filing status (i.e., single, married) and how much they make per week or month. Once this information has been inputted, the tool will calculate an amount that represents how much tax should be withheld.

What are the consequences for not withholding employee tax?

If an employer is not withholding taxes from their employees, the employee may be required to make up for those amounts. This can result in fines and penalties. In extreme cases, the employer may be held criminally liable.

An experienced attorney can help you to better understand the ins and outs of tax withholding.