What is withholding?

Withholding money is the portion of an employee's wages that is kept out of their pay. This portion is paid to federal, state, or local tax authorities. The amount withheld along with the employee's earned wages  is shown on the W-2 form they receive at the end of the year  .

The deduction minimises the amount of tax that employees need to pay when filing their annual tax returns.

What does withheld tax mean?

In the US, all income earners are required to pay income taxes to the federal government and some state governments. This tax money is used to enhance the well-being of residents through the health, education, social security, and food and agriculture sectors.

Tax authorities require employers to withhold a portion of their employees' wages to ensure that all working residents pay their income taxes. Employers collect this money and send it to the Internal Revenue Service (IRS).

How is withheld tax calculated?

Individuals starting a new job  must fill out  a W-4 form for their employer . The W-4 ensures that income and deductions are correctly calculated on the employer's wages. This includes providing information such as income, marital status, number of dependents, and number of jobs. These factors will determine the amount to be deducted.

Nonresidents — those who were not born in the U.S. and do not meet the requirements of the green card test or the substantial presence test to be considered residents for tax purposes — must fill out Form 1040NR if they are engaged in a trade or business in the U.S.

To calculate the deduction, you will need the employee:

• W-4 Form or 1040 NR.  Make sure all relevant information is provided by the employee.
• Payroll period details.  Find out the frequency of the employee's pay period (weekly, biweekly or monthly).
• Adjusted gross pay for the pay period.  This will be the total amount paid to them during their pay period as salary or wages.

Then you need to choose a calculation method. There are two options for this:

• The wage bracket method.  This involves using IRS tax tables to determine an employee's wage range. You   can find these tables in the updated 2020 Publication 15-T , which has instructions and worksheets to guide you through the calculations.
• Percentage method.  If an employee's taxable pay is higher than the last bracket of the tables, you must use the percentage method. Generally considered more complex than the salary bracket method, it involves using formulas that are included in Publication 15-T linked above. There are different instructions and worksheets depending on whether you use an automated payroll system or a manual payroll system.

The IRS also recommends that you use your  tax deduction estimator  to ensure you're deducting the correct amount of tax from your employees' pay.

Can the withheld tax be refunded?

Taxes withheld are generally not refundable. But if there has been a calculation error and/or too much money has been withheld, the employee will be issued a refund.

What is the average deduction from salary?

Prior to 2020, the average deduction from pay was determined based on how many deduction allowances the employee claimed. As Bloomberg Tax reports  , the value of deduction allowances was set at $4,200 in 2019.  Each deduction allowance will reduce the amount deducted per pay period as follows:

• Weekly: $80.80
• Biweekly: $161.50
• Semi-monthly: $175
• Monthly: $350
• Quarterly: $1,050
• Semiannual: $2,100

Personal allowances are no longer used on Form W-4 in 2020 due to changes in 2020. Instead, those earning $200,000 or less ($400,000 or less if married and filing jointly) multiply the number of dependents under age 17 by $2,000, and multiply other dependents by $500, and add the amounts to get the amount that will be used to adjust withholding based on dependents.

Employees who have already completed a Form W-4 from 2020 do not need to file a new form, and employers will continue to use the information on employees' most recent Form W-4 to figure deductions.