Withholding Tax Law and Legal Definition

Withholding tax is deducted directly from an employee's paycheck to allow the reliable collection of income taxes. This reduces the perceived burden of the tax, because employees never handle the money. Direct withholding also discourages cheating, because it requires the collaboration of employers, and as there are fewer employers than employees. However, direct withdrawal also has some drawbacks: it puts part of the burden of processing taxes on the employer, and it also complicates matters when the employee is in a situation where he or she should pay significantly less or more than what is expected from its salary (because of tax-deductible expenses, or side revenues).

Withholding taxes are subject to federal and state tax laws, which vary by state. Factors considered include, among others, the nature of the employment, the amount earned, eligible benefits, marital status, number of exemptions claimed, and the type of business being operated. If you claim exemption from withholding, your employer will not withhold federal income tax from your wages. The exemption applies only to income tax, not to social security or Medicare tax. Local laws should be consulted for withholding requirements in your area.