Definition of Withholding
Deducting amount from a salary of an employee in order to fulfill government requirements is known as withholding. There are different types of withholding, these are listed below:
- Withholding federal income tax
- Withholding state income tax
- Federal Insurance Contributions Act (FICA) tax deductions
- Other withholdings
Explanation of Withholding
One of the major type of withholding is withholding federal income tax; employers/organizations are supposed to deduct amount of tax like income tax from an employee’s pay. The amount to be deducted depends on an employee’s salary and any tax exemptions that he/she has. The main reason for deducting taxes from an employee’s pay is that this provides a constant cash inflow to the Federal government. Government uses this money to carry out development plans and other similar projects.
The deduction from an employee’s pay check which an organization sends to the state tax authorities directly is called withholding state income tax.
Federal Insurance Contributions Act tax withholdings is done for the medical care, social security etc. of an employee. These are automatic deductions and need no permission from an employee.
Other withholdings include deductions from an employee’s pay for charities, retirement plan, provident fund etc. It is mandatory to take an employee’s approval for these types of deductions.
