Withholding
The federal income tax is a pay-as-you-go tax. You must pay
taxes as you earn or receive income throughout the year.
There are two methods for paying taxes:
- Withholding
- If you are an employee, your employer probably withholds income tax
from your paycheck.
- Income received from pensions, bonuses, commissions, gambling
winnings, and other sources may also have income tax withheld from
the amount you receive.
- The amounts withheld are paid to the IRS on your behalf.
- Estimated Tax Payments
- If you do not pay taxes through withholding, or do not pay
enough tax through withholding, you may need to make estimated tax
payments to make up the deficit.
- Generally, people who are in business for themselves pay their
taxes through estimated payments.
- Tax on income received from dividends, interest, rents,
royalties, and capital gains is generally paid through estimated
payments.
If you do not have enough taxes withheld, or you do not pay
enough in estimated taxes, you may be subject to a penalty
for underpaying your taxes.
The IRS Withholding Calculator can help you
determine if your withholding is appropriate for your income,
dependents and other tax information.
If your income is low enough that you will not have to pay
income tax, you may be exempt from income tax withholding. You may
still be subject to Social Security and Medicare tax withholdings.
You can claim an exemption from income tax withholding only if:
- For the prior tax year you received a refund, or were entitled
to a refund, of all federal income tax withheld because you had no
tax liability.
- For the current tax year you expect to receive a refund of all
federal income tax withheld because you expect to have no tax
liability.
For more information, see IRS
Publication 505.