What is the witholding tax, please explain detail
Withholding tax refers to the amount that employer holds from the wages of the employees and pay directly to the government as a tax.This includes income tax, social security and medicare, also a few taxes in some states.
Basically there are three types of withholding taxes which are imposed at various levels-:
a) Wage withholding taxes.
b) Withholding tax on payments to foreign persons
c) Back Up withholding on dividend and interest.
Detailed explanation is as follows-:
a) Wage withholding taxes-
Withholding by employers of tax is required by the federal states and some local government.
Income tax withheld on wages= Amount of wages - amount of declared withholding allowances(Exceptions)
The amount to be withheld is based on both the amount wages paid on any paycheck and the period covered by the paycheck,withheld payments are treated as a tax paid by the employees on account for the tax due per year, since this amount was paid to the government by the employer itself..
b) Withholding tax on payments to foreign persons
Here foreign person refers to non-resident aliens, foreign corporation and foreign partnership,so any company and individuals who are making certain payment to any of above must withhold federal income tax on those payments.These payment to withholding includes interest, dividend, rent, royalties etc.
Withheld tax is 30% on the gross amount.
c) Back Up withholding on dividend and interest.
Payers of Interest and dividend must withhold 28% as a federal income tax on such payments, whereas it only applies if resident is a US person and either from below-:
1) The person has not provided the tax identification number on W-9 Form to the payer.
2) IRS notified the payer that payer must withhold the amount.
Failing to pay federal taxes withheld can result in penalty of 100% of amount not paid and paying withheld taxes with delays may result in penalty of 10%, plus interest on payment which are not made on time.
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