Tax withholding is the amount of money that an employer withholds from an employee's paycheck to pay federal, state, and local taxes.
The amount of tax withheld depends on the employee's income, filing status, and the number of allowances claimed on their W-4 form.
When an employee starts a new job, they fill out a W-4 form that indicates their filing status, number of allowances, and any additional withholding they want to request.
The employer then uses this information to calculate the amount of federal income tax to withhold from the employee's paycheck.
The withheld taxes are then paid to the IRS on the employee's behalf.
If too much tax is withheld, the employee will receive a refund when they file their tax return.
However, this means that the employee has essentially given the government an interest-free loan for the year.
If too little tax is withheld, the employee may owe additional taxes when they file their tax return.
In some cases, the employee may also be subject to penalties for underpayment of taxes.