The U.S. uses a pay-as-you-earn system of collecting personal income taxes. At the end of the year, you will have to pay any extra taxes not covered by the withholding or receive a refund if the amount withheld is too much.

Types

If you work as an employee of a company, the company will withhold income from each paycheck for federal income taxes. If you are self-employed, you must make estimated tax payments during the year.

Size

The amount to withhold must be at least 90 percent of your total amount of tax due at the end of the year. You can also base your withholding on your prior year's tax bill. If your adjusted gross income is over $75,000, you need to have 110 percent of the prior year's taxes withheld. If it is below that threshold, you only need to have 100 percent of the prior year's taxes withheld over the course of the year.

Effects

If you do not have enough money withheld during the year, you may have to pay additional interest and penalties to cover the shortfall. If you have had too much withheld, you will get a refund from the government when you file your taxes.

Considerations

If you are an employee, you must submit a W-4 form showing how many allowances you are claiming. Each allowance you claim reduces the amount of money that will be withheld from your paycheck.

History

Federal income tax withholding was started in 1943 when the Current Tax Payment Act was passed to help the government in the collection of federal income taxes.

Source:

Evolution of Income Tax Withholding

Federal Income Tax Withholding