Withholding Tax

Entry Level Withholding Tax

Withholding tax is required by government, which requires the payer (usually the employer) of an income to withhold or deduct tax from the payment (income), and to pay it to the government. In most countries and jurisdictions withholding tax mostly applies to employment income.

Many jurisdictions also require withholding tax on the payment on interest or dividends. If in the case the recipient of the income resides in a different jurisdiction most jurisdictions then also require additional withholding tax obligations. In such circumstances withholding tax applies to rent, royalties or the sale of a real estate. Withholding tax is usually used by most governments in an attempt to combat tax evasion.

How is withholding tax treated?

Withholding tax is treated as a final payment on the account of the recipient’s final tax liability. The recipient’s (tax payer) withholding tax may be refunded if it is determined. That is if the tax return filed states that the tax liability to the government which received the withholding tax is less than the tax withheld, or additional tax may be due if it is determined the recipient’s tax liability is more than the withholding tax.

The amount of withholding tax on income other than employment income is usually a fixed percentage. With employment income, the withholding tax is based on an estimate of the employee’s final tax liability, which is determined either by the employer or government.

This article is just a basic introduction to withholding tax. For more detailed information concerning withholding tax, please consult Tax Relax, for up to date, professional advice.
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