The rules for federal payroll withholding tax are quite straightforward, applying to most employees in the United States, regardless of location. The rules for withholding tax tend to be more complicated on the state side, however, they are location specific and may even include local withholding tax. Here’s a rundown of the various federal, state, and local withholding tax to help you grasp the complexity of payroll withholding tax.
What is withholding tax?
Withholding tax is an amount that an employer withholds from its employees' wages and pays directly to the government. The amount withheld is a credit against the income taxes the employee must pay during the year. Withholding tax is also a tax levied on income from securities owned by a non-resident as well as other income paid to non-residents of a country.
Withholding tax broken down
There are two types of withholding taxes implemented by the Internal Revenue Service (IRS) so as to ensure tax is withheld in one of two different situations:
1. The most common is withholding tax on personal income that all employers in the USA must collect.
2. The second, less common one is withholding tax levied against non-residents of the USA to make sure that proper taxes are made on income sources earned within the USA.
Withholding tax is also one of two types of payroll tax. The other type is based on the employee's wages and is paid directly to the government by the employer, and the employee pays the remainder when he or she files his or her tax return in April each year. If too much tax is withheld, the remainder with be refunded to the employee but if the amount of the withholding tax has not been enough, the person will owe money to the IRS.
US resident withholding tax
Non-resident withholding tax
The different types of withholding tax
The list below will give you an idea about the taxes concerned by withholding tax:
Federal income tax
Social security and medicare tax
State income tax
4. New Hampshire
5. South Dakota
In all other states besides those listed above, employers must take state income tax out of their employees’ taxable wages according to the rules of the state revenue agency.
Many states adopt a withholding tax model that is similar to the federal income withholding tax. The employer, however, must refer to the employee’s state withholding tax form and the state withholding tax tables. A few states, such as Pennsylvania and Alaska, require withholding tax based on a percentage of each employee’s taxable wages.
Local income tax
Additional state-based withholding tax