What is Tax withholding?

Tax withholding is the pay-as-you-go system for US income tax. Instead of the employee paying the whole bill at the end of the year, the employer holds back an estimated amount from every paycheck and sends it to the IRS, and to the state where one applies. The amount withheld counts as a credit against the employee's final tax bill, which is why it is reported on the Form W-2 each January. If too much was withheld the employee gets a refund, and if too little the employee owes the difference.

Federal income tax withholding is calculated from two inputs: the employee's Form W-4 and the IRS withholding tables or percentage method published in Publication 15-T. The W-4 tells the employer the filing status, whether the employee has other jobs, any dependents and any extra amount to withhold. The employer applies the tables to the taxable wages of the pay period, so the result changes with the pay frequency and with the employee's earnings.

Withholding for income tax is not the same as the employment taxes that make up FICA. Social Security and Medicare are fixed percentages of wages, with the employee's share deducted from pay and a matching employer share paid on top. For 2026 the IRS lists the employee rates as 6.2% for Social Security, up to a wage base of $184,500, and 1.45% for Medicare, plus an Additional Medicare Tax of 0.9% on wages above $200,000 that the employer withholds but does not match. Together the amounts an employer holds back, income tax plus the employee share of FICA, are often called payroll tax withholding.

Withholding is the employer's legal responsibility. The money held from employees is treated as held in trust for the government, and the employer must deposit it on the schedule the IRS assigns, report it on the quarterly Form 941, and give each employee a Form W-2 at year end. Most states, and some cities, also have their own income tax withholding with separate forms and deposit rules. Late or missing deposits carry penalties, and the people responsible for payroll can be personally liable for the unpaid trust fund taxes.

International payroll adds more questions. Employees who are not US citizens or residents, such as nonresident aliens, follow special rules for completing the W-4 and may be covered by a tax treaty, so a company that pays workers across borders needs to know each person's tax status before choosing how much to withhold. Workers classed as independent contractors are not subject to withholding, which is one reason the classification matters.