Tax withholding in the United States
Encyclopedia
Three key types of withholding tax are imposed at various levels in the United States:
  • Wage withholding taxes,
  • Withholding tax on payments to foreign persons, and
  • Backup withholding on dividends and interest.


The amount of tax withheld is based on the amount of payment subject to tax. Withholding of tax on wages includes income tax, social security and medicare, and a few taxes in some states. Certain minimum amounts of wage income are not subject to income tax withholding. Wage withholding is based on wages actually paid and employee declarations on Federal and state Forms W-4. Social Security tax withholding terminates when payments from one employer exceed the maximum wage base during the year.

Amounts withheld by payers (employers or others) must be remitted to the relevant government promptly. Amounts subject to withholding and taxes withheld are reported to payees and the government annually.

History

In the History of the U.S. Tax System, the U.S. Department of Treasury describes tax withholding.

Withholding on wages

In the United States, withholding by employers of tax on wages is required by the federal, most state, and some local governments. Taxes withheld include federal income tax, Social Security
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...

 and Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...

 taxes, state income tax
State income tax
State and local income taxes are imposed in addition to Federal income tax. State income tax is allowed as a deduction in computing Federal income tax, subject to limitations for individuals. Some localities impose an income tax, often based on state income tax calculations. Forty-three states...

, and certain other levies by a few states.

Income tax withheld on wages is based on the amount of wages less an amount for declared withholding allowances (often called exemptions). Amounts of tax withheld are determined by the employer. Tax rates and withholding tables apply separately at the federal, most state, and some local levels. The amount to be withheld is based on both the amount wages paid on any paycheck and the period covered by the paycheck. Federal and some state withholding amounts are at graduated rates, so higher wages have higher withholding percentages. Withheld income taxes are treated by employees as a payment on account of tax due for the year, which is determined on the annual income tax return filed after the end of the year (federal Form 1040 series, and appropriate state forms). Withholdings in excess of tax so determined are refunded.

Employees must provide their employer with a Federal Form W-4. Many states require a similar form. The form provides the employer with a Social Security number. Also, on the form employees declare the number of withholding allowances they believe they are entitled to. Allowances are generally based on the number of personal exemptions plus an amount for itemized deduction
Itemized deduction
An itemized deduction is an eligible expense that individual taxpayers in the United States can report on their federal income tax returns in order to decrease their taxable income....

s, losses, or credits. Employers are entitled to rely on employee declarations on Form W-4 unless they know they are wrong.

Social Security tax is withheld from wages at a flat rate of 4.2% for 2011. Wages paid above a fixed amount each year by any one employer are not subject to Social Security tax. For 2009 and 2010, this wage maximum is $106,800. Medicare tax of 1.45% is withheld from wages, with no maximum. Employers are required to pay an additional equal amount of Social Security and Medicare taxes.

A few states also impose additional taxes that are withheld from wages.

Wages are defined somewhat differently for different withholding tax purposes. Thus, federal income tax wages may differ from Social Security wages which may differ from state wages.

Withholding on payments to foreign persons

Companies and individuals who make certain types of payments to foreign persons must withhold Federal income tax on those payments. Foreign persons include nonresident aliens, foreign corporations, and foreign partnerships. Payments subject to withholding include compensation for services, interest, dividends, rents, royalties, annuities, and certain other payments. Tax is withheld at 30% of the gross amount of the payment. This withholding rate may be reduced under a tax treaty
Tax treaty
Many countries have agreed with other countries in treaties to mitigate the effects of double taxation . Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes...

. This tax withheld is usually considered a final determination and payment of tax, requiring no further action or tax return by the foreign person.

In addition, partnerships are required to make tax payments (referred to as withholding) on behalf of foreign partners. These payments are required regardless of whether income is actually distributed to the partner. Payments are also required quarterly or at year end for business income or other undistributed income. Partnership payments on business income are treated like estimated tax payments, and the foreign person must still file a U.S. tax return reporting the business income.

Purchasers of U.S. real estate must withhold 10% of the sales price from payments to foreign sellers. This amount can be reduced to the anticipated Federal income tax due, upon advance application on Form 8288-B to the Internal Revenue Service. These payments are treated like estimated tax payments, and the foreign person must still file a U.S. tax return reporting any gain or loss.

Backup withholding

Payers of interest, dividends, and certain other items must withhold 28% Federal income tax on such payments in limited circumstances. Generally, this applies only if the recipient is a U.S. person and either
  • the person has failed to provide a tax identification number on Form W-9 to the payer, or
  • the IRS has notified the payer that it must withhold.

Payment of withheld taxes

Withheld taxes must be paid to the appropriate government promptly. Rules vary by jurisdiction and by balance of total payments due. Federal employment tax payments are due either monthly or semi-weekly. Federal tax payments must be made either by deposit to a national bank or by electronic funds transfer. If the balance of Federal tax payments exceeds $100,000, it must be paid within 1 banking day. Beginning January 1, 2011, payments may be made only by electronic funds transfer. State rules vary widely, and generally allow slightly more time for deposit of withheld taxes.

Reporting of withheld taxes

Employers must file a quarterly report of aggregate withholding taxes, Form 941, with the Internal Revenue Service. This report includes income, Social Security, and Medicare tax totals for the quarter. Partnerships making payments for partners must file Form 8813 quarterly. State requirements vary.

All persons withholding taxes must file annual Federal and state reports of the tax withheld and the amount subject to withholding. A copy must be provided to the employee or other payee. The relevant forms are as follows:
  • Form W-2 series for wages (the Federal report is also used for states), due to employees by January 31. A summary is filed on Form W-3.
  • Form 1042-S for payments to foreign persons, due to payees by March 15. A summary is filed on Form 1042.
  • Form 8805 for partnership payments, due at the same time as the partnership return. A summary is filed on Form 8804.
  • Form 1099 series for backup withholding


Federal filings must be done electronically if more than 250 forms are required. States generally do not require separate filings other than for partnerships, instead relying on information provided by the IRS.

Penalties

Failing to pay Federal taxes withheld can result in a penalty of 100% of the amount not paid. This may be assessed against anyone responsible for the funds from which payment of withheld tax could have been made.

Paying withheld Federal taxes late may result in penalties up to 10%, plus interest, on the balance paid late. State penalties vary. Failure to timely file withholding tax forms may result in penalties up to $50 per form not filed.

Intentional failures may result in criminal penalties.

See also

  • Income tax in the United States
    Income tax in the United States
    In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...

  • Social Security (United States)
    Social Security (United States)
    In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...

  • Medicare (United States)
    Medicare (United States)
    Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...

  • IRS penalties
    IRS penalties
    Taxpayers in the United States may face various penalties for failures related to Federal, state, and local tax matters. The Internal Revenue Service is primarily responsible for initiating these penalties at the Federal level. The IRS can impose only those penalties specified in Federal tax law...

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