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Simple English definitions for legal terms
withholding tax
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A quick definition of withholding tax:
Withholding tax: When you earn money, the government takes a small part of it as tax. Withholding tax is when your employer takes this tax out of your paycheck before you even get it. This helps make sure that you pay your taxes on time and don't owe too much money at the end of the year.
A more thorough explanation:
A withholding tax is a type of tax that is deducted from an employee's paycheck by their employer and paid directly to the government. This tax is usually based on the employee's income and is used to cover their income tax liability.
For example, if an employee earns $50,000 per year and their withholding tax rate is 20%, their employer will deduct $10,000 from their paycheck and pay it directly to the government. This helps ensure that the employee pays their income tax liability throughout the year, rather than having to pay a large lump sum at the end of the year.
Withholding tax is also commonly applied to other types of income, such as dividends, interest, and royalties. In these cases, the payer of the income is responsible for withholding the tax and paying it directly to the government.