Tax withholding is when your employer deducts a specific amount of federal income tax directly from your gross wage and sends it to the government’s Internal Revenue Service (IRS) on your behalf.

The amount of income tax your employer withholds from your gross pay depends on the amount you earn and the information you give them on Form W4 about your filing status and dependents. The employer withholds this amount as a credit for the income taxes the employee is likely to pay during the year.

What Is the Purpose of Withholding Income Tax?

Tax withholding enables the US government to maintain its pay-as-you-go (or pay-as-you-earn) tax system by taxing individuals at the source of their income, rather than after wages are paid. 

Withholding ensures that employees pay whatever income tax they owe to the IRS, which limits tax evasion and the need for taxpayers to owe large, unaffordable tax bills at the end of the tax year.

There are two types of payroll taxes. The other type is based on an individual employee’s income and is paid to the government by the employer as contributions towards Social Security, federal unemployment programs, and Medicare.

Types of Tax Withholding

Tax withholding amounts and sources depend on your residency status.

For US Residents

Every employer in the US must withhold federal income tax from a US resident’s personal income and remit it directly to the government. Employees are then required to pay the remaining amount they owe when they file their tax return in April each year.

If too much tax is withheld, the result is a tax refund, but if not enough tax has been withheld, the individual will owe money to the IRS.

Investors and independent contractors are exempt from tax withholding, as they don’t have an employer. However, they are required to pay estimated taxes.

For Nonresidents

A nonresident is someone who isn’t a US citizen or national and hasn’t passed the green card test or substantial presence test.

All nonresidents must file Form 1040NR if they engaged in a trade or business in the US during the year. This ensures that proper taxes are paid on income sources from within the country.

There are IRS deduction and exemption tables to help nonresidents determine when to pay US taxes and which deductions they may be able to claim.

When To Check Your Withholding

Too much tax withholding will mean you’re out of pocket until you receive a refund, whilst too little can lead to an unaffordable tax bill or penalty.

The tax withholding amount is based on the information that you provide to your employer on your W4 form when you start a job. If you are significantly overpaying or underpaying on federal income tax, it’s probably because you need to update the information on your W4 Form. 

It’s essential to check your withholding amount and make any updates at certain times, including:

  • When you experience lifestyle changes: For example, if you get married, file for a divorce, give birth to or adopt a child, purchase a home, reach retirement age, or file for Chapter 11 bankruptcy.
  • When your gross income changes: For example, if you or your spouse start or stop working, pick up a second job, or receive a higher-paid promotion.
  • When federal tax laws change: For example, the One Big Beautiful Bill Act, which was signed into law on July 4, 2025, will have a significant effect on federal taxes, credits, and deductions.

You can use the IRS’s Tax Withholding Estimator to estimate your federal income tax for next year and how much of a refund or tax bill you can expect. This enables you to choose an estimated withholding amount that’s suitable for you, and update your employer. 

If an employer doesn’t make adjustments to an employee’s tax withholding amount, you might need to file IRS Form 843 to receive a refund.

Tax Withholding vs Estimated Tax

Estimated tax is when you pay taxes directly to the IRS in quarterly instalments (April, June, September, and January of the following year) instead of through employer withholding. The amount you pay is based on estimated annual income and tax liability.

Whilst any employee who receives wages is likely to be subject to tax withholding, estimated tax applies to self-employed individuals, freelancers, gig workers, independent contractors, and people with income from investments, rentals, or side businesses.

In addition, anyone whose employer did not withhold enough income tax from their wages will be subject to paying estimated tax.