What is withholding tax mean?

Answer 1

For a better tax payment, it's necessary to have a clear knowledge of the common taxes, especially withholding tax and estimated tax. We may be much more familiar with the withholding tax in daily life, because almost all employees need to file the withholding tax from income. This works similarly for the self-employed ones in the way of estimated tax. In general, tax comes from individuals and corporations by the city, state, or country in which the entity resides or operates. When the tax collected is credited to the government of the country's account, we call it federal tax. It is a pay-as-you-go tax and we can pay this tax in the following two ways.

1. Withholding Tax Withholding tax is one kind of the income tax. It means your boss pay it directly to the government from your salary. And the amount withheld is a credit against the income taxes you must pay during the year. According to IRS, there are two different types of withholding taxes. Firstly, every employer in the United States should file the withholding tax according to employees' personal incomes. And we call it the U.S. Resident Withholding Taxes. The other form is the nonresident withholding taxes. As long as you gain income within the United States, proper taxes is inevitable. All nonresident citizens, who didn't pass the green card or a substantial presence test, must file Form 1040NR if they are in a trade or business in the United States during the year. Meanwhile you can claim standard IRS deduction and exemption when paying U.S. taxes. In a word, withholding tax is necessary for most of us who work in a company.

2. Estimated tax Whether you receive your income from a job, self-employment, or other sources, You must pay estimated taxes on the income during the year. If your income comes from self-employment, business earnings, interest, rent, dividends and other sources, estimated tax is a must.

In general, we need to pay estimated tax quarterly, typically in 4 equal installments. Each period has a specific deadline, and your punctuality in the estimated tax helps avoid penalties. Even if you've already missed a few installments for estimated tax, you should still try to pay them as soon as possible. If you are one of them, you need to make estimated tax payments with IRS Form 1040-ES. • Self-Employed Persons or Sole Proprietor Business Owners. Estimated tax payment is necessary if your tax liability is more than $1,000 for the year, including both part-time and full-time enterprises. • Partners, Corporations, and S Corporation Shareholders. Business ownership earnings require estimated tax payments as well. And estimated tax payments occur after $500 tax liability. • People Who Owed Taxes for the Prior Year. If you owed taxes at the end of last year, it probably means that too little was withheld from your paychecks, or you had other income that increased your tax liability.