Withholding

Withholding is any amount of money that an employer does not pay out to an employee but instead is retained in a special account or paid by that employer on behalf of the employee to the government treasury department to offset expected taxes that will be owed by that employee for that tax year.

This amount of cash is then held in reserve by the government until the employee files their tax return for the year in which the money was earned. If the employee owes taxes, the amount that was withheld by the employer will be used to pay on any taxes that are owed by the employee. If the employee owes less tax than was paid in through withholding, the government will issue a refund upon request.

The purpose for this deduction is to pay any tax an employee may owe the government, which could be a significant amount of money at the end of a tax year. If all cash were paid to the employee during that year, the employee may not have sufficient funds on hand at tax time to pay their taxes. This is, in a subtle manner, a form of a savings account that is forcibly made for the employee by the government.

Any regular employee should have this small amount of money deducted by the employer, including small business employers. Exceptions would be for contract employees, freelancers, and those who file a W4 exemption form stating that they are exempt from mandatory deductions.

For contract employees, the employer may have an option of whether to provide these deductions or simply provide that employee with a 1099 at the end of the tax year that shows total income. The employee is required to pay their own taxes based on their income, including all income reported on the 1099. Form 1099 income is reported to the government tax agency by an employer.