What Is a Withholding Tax?

A withholding tax is an amount that a company deducts from an employee’s salary and pays to the government directly. The amount withheld is used as a credit against the employee’s taxable income for the year. It’s also a tax on nonresident aliens’ income (interest and dividends) from securities, as well as other income is given to nonresidents of a nation. The great majority of persons who earn money from a trade or business in the United States are subject to withholding tax.

There may be other definitions but, generally, it refers to federal and state income tax withheld by an employer from an employee’s paycheck. Federal withholding includes income tax and FICA, which consists of medicare and social security.

The withheld funds are then forwarded to the appropriate taxing authority, typically on a quarterly basis.