Understand What Is Withholding And Why It Has Its Role In Tax
When it’s tax season, withholding is one term that you hear about a lot. But what is it? How does it work for you? And should you worry about them? Tax rules can be complicated and overwhelming when you’re not ready to soak everything in. But after you know how it works, you will see how it benefits you in the long run.
What is Withholding
The term refers to a portion of your paycheck that is directly paid to the tax authorities. In many cases, your employer is doing the tax cut so you don’t have to. Medical tax and social securities are examples of this practice. Several things that matter to the amount are your income, number of dependants, and marital status.
For example, if you’re a single person with a single source of income, you may only need to pay a small amount of tax. While if you’re married with children, with multiple sources of income, the amount may differ since you have several allowances. And if you choose to claim 0 on your W-4 form, the amount they withhold will be large since you’re not having any allowances or dependents.
How It Can Help You
Even though it may seem negative at first, you can use this practice to reduce your tax liabilities. In a sense, the tax agency sees the amount you withhold as the advance payment for your income tax. So if you’re paying more for income tax, the IRS will refund to balance as the tax refund. Therefore, when filing the W-4 form, you need to stay accurate and keep the information up to date.
Federal and State Regulation
Keep in mind there are two types of tax agencies that you need to pay. Federal tax means you’re paying directly to the federal agency. They calculate the amount from the income, number of dependents, and whether you’re the sole earner in the household.
Always check if your resident state applies income tax. If you have multiple residences and work across the states, you may owe tax on all of those states. Several states like Virginia and Washington DC even required you to withhold federal tax before the state taxes.
Some Things to Note
You can withhold your retirement account, including the 401k plan from your workplace. Keep in mind that the contribution to this account is taxable. Choosing to withhold the tax means you may receive the tax-free amount when withdrawing the funds.
Another thing to remember is you can opt to keep this account when you’re being unemployed. This will help you avoid paying the full tax when it’s due.
Withholding tax is common and not something you should be worried about. It’s an early payment you pay directly from your income to the tax agency to hold. Later, you can use the amount to reduce or offset your tax. When you have more in your account than your tax return, the IRS will reimburse the difference to you.
