withholding tax

Withholding tax is a portion of income that an employer or payer deducts automatically before paying the recipient. This amount is sent directly to the government as a prepayment of the recipient’s income tax obligation. It ensures tax collection is efficient and helps prevent tax evasion. When the recipient files their annual tax return, the withheld amount is credited against their total tax liability. If too much was withheld, they may receive a refund; if too little, they may owe additional tax. Withholding tax applies to various income types, such as salaries, dividends, and interest.