Withholding Tax – What is it?

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What is withholding tax and how do you know whether or not it applies to you or affects you?

Withholding tax is an amount of money that is withheld by the party that is making a payment to the other individual who is known as the payee that is paid to the Internal Revenue Services or other taxation authorities. The particular amount of money that the payer deducts can range in total value depending on the nature of the product or service that is being paid for. The way the process works is that the payee is assessed on the gross amount of income and the amount that is going to be deducted is calculated based on that gross amount. The general purpose of withholding tax is to facilitate or speed up collections by collecting tax from each tax paying individual rather than a larger amount of payees. Withholding tax may also be used to collect taxes from taxpayers within a specific jurisdiction. Withholding tax may also be used to counteract the tax evasion and tax avoidance schemes.

Domestic withholding tax is normally applied to individuals who receive an earned income in a situation where the payee might avoid declaring the income earned. An example for this situation may be when individual works on a contract basis as neither a registered business or as an employee. Some countries require the employer to withhold a percentage of the person’s income and submit it to the Internal Revenue Service or other tax authorities. The taxpayer is usually a business and would in most cases be required to submit details of the identity of the individual whom the taxes were being deducted from.

Tax may be deducted at the source or by dividend payments. This may be in addition to corporation taxes. The tax credit once represented advanced corporation tax or ACT by paid by the company, but the advance corporation tax was abolished and terminated by in 1999. Withholding tax can also be achieved by interest. Interest taxing methods work by having a minimum rate of tax deducted at a source of savings in interest payments. In the United States, it is unusual that the Internal Revenue Service will require withholding taxes to be obtained through methods of interest other than wages or salaries. On the contrary, taxpayers are usually required to apply backup withholding if the payee has been unsuccessful in providing proper tax identification numbers or if the payee has been unsuccessful to report income in previous years.

Most commonly, most jurisdictions require employers to require taxes to be deducted from the individual’s salary or payroll. However, in the contrast, the United Kingdom requires self-employed individuals to pay income tax after the end of the year. In the United States, self-employed individuals or business owners are required to pay their taxes in estimated tax amounts during each tax quarter or face paying interest to the Internal Revenue Service or other tax authorities.

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