Tax withholding is the process by which an employer deducts a portion of an employee's wages and sends it directly to the government as a prepayment of the employee's income taxes. This withheld amount acts as a credit against the employee's total annual income tax liability

. In the United States, tax withholding applies primarily to employment income, but can also apply to payments such as interest, dividends, royalties, and rent, especially when paid to nonresidents

. The withheld tax is reported annually to the employee on a Form W-2, which is used to file their tax return

. The system is designed as a pay-as-you-go tax collection method, ensuring taxes are collected throughout the year rather than in a lump sum at tax time. If too much tax is withheld, the employee receives a refund; if too little is withheld, they may owe additional tax when filing

. Factors influencing the amount withheld include the employee's earnings, filing status, withholding allowances claimed, and any additional withholding requested. Employers remit the withheld taxes directly to the IRS in the employee's name

. There are two main types of withholding tax in the U.S.:

• U.S. Resident Withholding Tax: Applies to most employees and is based on estimates of annual tax liability

• Nonresident Withholding Tax: Applies to foreign individuals earning income from U.S. sources, with specific rules and forms (e.g., Form 1040NR)

Tax withholding also includes amounts withheld for Social Security and Medicare taxes

. In summary, tax withholding is a mechanism to collect income tax gradually by deducting it from wages or other payments at the source, helping taxpayers meet their tax obligations efficiently and avoiding large payments or penalties at tax time