Withholding tax is a type of income tax that is withheld from an employees wages and paid directly to the government by the employer. The purpose of withholding tax is to collect income tax at the source, as wages are earned, as part of the states "pay-as-you-go" plan of income tax collection. The vast majority of people who are employed in the United States are subject to tax withholding. Nonresident aliens are also subject to withholding taxes on earned income as well as on other income such as interest and dividends from the securities of U.S. companies that they own.

There are two different types of withholding taxes employed by the Internal Revenue Service (IRS) to ensure that proper tax is withheld in different situations: the U.S. resident and nonresident withholding tax. The first and more commonly discussed withholding tax is the one on U.S. residents’ personal income, which every employer in the United States must collect. Under the current system, employers collect the withholding tax and remit it directly to the government, with employees paying the remainder when they file their tax returns. Nonresident aliens are subject to a 30% withholding tax on certain types of U.S. source income.

In addition to income tax withholding, there are other types of withholding taxes, such as the Yonkers Resident Withholding Tax in New York City. Nonresident withholding is another type of withholding tax that applies to non-wage payments such as trust distributions, partnership and LLC distributions, rents, royalties, and gambling winnings. The payer must take 7% from the California income that exceeds $1,500 in a calendar year. Backup withholding is another type of income tax withheld on specific income types when a payee fails to provide the payer a correct taxpayer identification number (TIN) or certify exemption from backup withholding.