Tax withholding is a way of collecting tax before income reaches the person who earned it. This lesson explains who withholds and pays the tax, how withholding relates to a recipient’s final tax liability, and how wage and other domestic withholding systems work.
Tax withholding—also called tax retention, pay-as-you-earn tax, or tax deduction at source—is income tax paid to the government by the payer of income rather than directly by the recipient. The payer deducts an amount from the payment due to the recipient and sends it to the relevant government authority.
All flashcards
What is tax withholding?
The payer deducts tax from an income payment and sends it to the government on the recipient’s behalf.
How is advance withholding reconciled with final tax liability?
It is credited toward the final liability; an excess may be refunded, while a shortfall may require additional payment.
What is final withholding?
Withholding that fully discharges the recipient’s tax liability for a payment, so further tax or a return for it may not be required.
How may an income tax treaty affect withholding?
It may reduce withholding rates on particular types of income paid across borders, subject to the relevant procedures.
What is a foreign tax credit?
A credit that may be available in a payee’s home country for tax paid abroad, subject to local rules.
Quiz questions
Which payments to non-residents are commonly subject to withholding in many countries?Answer: Interest, dividends, and royalties.
What may an income tax treaty do to withholding on cross-border income?Answer: Reduce the rate on particular types of income, subject to applicable procedures.
How are amounts withheld by a business generally regarded before they are remitted?Answer: As a debt the business owes to the tax authority.
Who typically receives reports of withheld amounts in systems with withholding-reporting requirements?Answer: The person whose income was subject to withholding and the collecting government authority.
What may allow a payee to claim relief for tax withheld abroad?Answer: A foreign tax credit in the payee’s home country, if its rules permit.
Based on the Wikipedia article Tax withholding, licensed CC BY-SA 4.0. Adapted into a summary, flashcards and quizzes.