What Does Withholding Tax Mean?: Tips for Understanding Your W-2
Filling out tax forms doesn’t have to be complicated and frustrating. With just a little bit of basic information, you can complete your W-2 in just minutes!
So if you find yourself wondering, what does withholding tax mean, this is the place to start.
Below is a quick summary of W-2 tax withholding and what you need to know to fill out your tax form.
The Basics of a W-2 Form
If you are currently looking at your W-2 form, you can locate box 2 for the total withholding tax. If you do not yet have a W-2 and are looking for a template, find it here.
This tax document will tell you what your withholding tax is. It will also include your salary and any other wages that are classified as income. The layout of the W-2 is easy to follow and there are explanations for each box.
If you have questions about other areas of your W-2 you can look on the IRS website for detailed information.
What Does Withholding Tax Mean?
You pay taxes on all your income. Your employer will take a certain amount of your income and pay it directly to the government to cover these taxes.
That money is “withheld” and used as a credit to what you owe in taxes. Your employer will determine the withholding amount based on your total expected income for the year.
If your employer takes more of your income than is necessary to cover the taxes, you will receive a tax refund. If your employer underestimates the tax amount, you will still owe more money after your taxes are processed.
There are two types of withholding tax – one for United States residents and one for non-residents.
If you are employed in the United States your employer is responsible for collecting the withholding tax amount and delivering to the government.
Usually, you pay about 90% of your income taxes through this withholding amount. This helps ensure you don’t owe a large sum of money after submitting your taxes each year in April.
For independent contractors, you do not have to pay withholding but you still need to pay income tax.
If you are not a resident, you have to complete a 1040NR form. Nonresidents are still required to pay taxes on income.
The withholding tax works the same way for nonresidents but the forms are slightly different.
Be Confident When Filing Taxes
So, what does withholding tax mean? It is the amount of money withheld from your paycheck by your employer to cover all or part of your income taxes paid to the government.
If you pay too much throughout the year, you will get a refund. If you haven’t paid enough, you will owe the IRS at the end of the tax year.
And if you’re looking for more business and lifestyle education, check out the other articles on our site!