Withholding tax is a mandatory function of the government to help fund the various agency's numerous expenditures and public services. Withholding tax is a government requirement for a consumer, employee, or taxpayer to withhold or deduct tax from a payment and pay the tax to the government.
To simplify, a withholding tax is a specific amount of money that is deducted straight from the amount of money you'd normally be paid. An employee of any company, during their typical pay-week, has taxes withheld by the government. The gross salary of the individual is the amount of money made before taxes, the net, however, is the true salary and the amount made after taxes are withheld by the government.
In a basic paycheck, the employer uses withheld taxes to pay the government; the money is taken by the Internal Revenue Service and the local government where the business operates. Money is also withheld from a paycheck to help contribute to fundamental government programs such as Social Security, and Medicaid.
The term withholding tax stems from the tax's characteristics that are reminiscent of a loan.During the typical workweek, the government withholds a percentage of an individual's salary. The money withheld is used by the government to fund public services and current expenditures. In turn, on tax day the withheld amount will be held against current taxes and the tax rate. If the individuals current taxes exceed the amount withheld a tax debt will ensue and the taxpayer will have to pay additional funds to the IRS.
In most cases, however, the taxes withheld exceed the money owed which results in a tax refund. When this occurs the taxpayer will receive a paper check or have funds deposited into their back account by US treasury department. The tax refund is a portion of money returned from the withholding tax; this represents the similarities between the withholding tax and a basic loan agreement.