Withholding Tax Definition

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 29, 2023

Define Withholding Tax in Simple Terms

A Withholding tax is an amount of money that an employer withholds from an employee's salary and pays directly to the government.

This amount is then considered a credit against the employee's income taxes for that year.

The majority of workers in the US who earn an income from a trade or business will have withholding tax levied upon them.

The Purpose of Withholding Tax in Finance

The purpose of a withholding tax is to allow the US government to tax residents at the source, i.e. their employer, rather than trying to collect taxes after they have been earned.

The primary type of withholding tax is US resident withholding tax, which is collected from every employer in the United States.

The only income exempt from withholding tax is income earned by independent contractors and investors, although those groups are not exempt from income tax.

Withholding Tax Example

Withholding tax may also be levied upon interest and dividend income from securities owned by a nonresident alien, as well as income earned by nonresidents of a country.

This is to ensure that proper taxes are levied on sources of income earned within the US.

Withholding Tax FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

Search for Local Tax Preparers

Find Advisor Near You