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Home » What Does Tax Withholding Mean? An Informative Guide

What Does Tax Withholding Mean? An Informative Guide

April 19, 2020 By The Fortunate Investor | This article may contain affiliate links. For more information visit our Disclosure

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Withholding tax written on a paper. Financial concept.Taxes might be inevitable, but that doesn’t mean most of us have any idea what we’re doing when it comes to filing them. The majority of Americans (90 percent) aren’t even able to answer basic tax questions correctly.

Does this sound like you? Do you have a lot of tax questions, like “What does tax withholding mean?”

If you’re confused about tax withholdings, keep reading. Explained below is everything you need to know about this important (but confusing) concept.

What Does Tax Withholding Mean?

To understand the tax withholding meaning, you first need to understand that the Internal Revenue Service (or IRS) collects taxes from the American people all throughout the year. Their collections aren’t reserved for April 15 (the day by which most people are supposed to file).

If you’re a W2 employee, the IRS withholds a portion of each paycheck you receive from your job. That money is used to pay state and federal taxes.

In the case of self-employed people and business owners, the IRS doesn’t withhold money automatically from your paychecks. It’s up to the individual to take money out of their own earnings and pay quarterly taxes.

This is a common mistake a lot of self-employed individuals and business owners make. They might forget to incorporate quarterly payments into their payroll management and bookkeeping system. As a result, they end up with a substantial bill when they’re filing their taxes.

How to Figure Out Your Tax Withholding

How to Figure Out Your Tax Withholding

You can answer the question “What are withholdings” and have a better understanding of the tax withheld meaning. You might be wondering how much of your paycheck actually goes to taxes, though.

If you’re self-employed or a business owner, you might also have questions beyond “What does it mean to withhold taxes?” For example, you might want to know how much you’re supposed to be withholding and setting aside for quarterly payments.

Whether you’re self-employed or a traditional employee, it’s helpful to know your specific tax withholding. To figure this out, you’ll have to use a W4 form:

  • Start by entering basic information (name, address, filing status, and Social Security number)
  • Move on to step 2 if you have multiple jobs or are married filing jointly (with a spouse who also works)
  • If you have children, move on to step 3 to adjust your withholding based on the number of children you have
  • Move on to step 4 and make adjustments for additional income from interest or retirement income, as well as deductions and any additional tax withholdings you want the IRS to make

If you have questions about your tax withholding, don’t be afraid to reach out to a professional. They can help you learn more about the tax system and ensure you’re doing everything correctly.

Take Care of Your Taxes Today

If you’ve been putting off handling your taxes because you couldn’t answer questions like “What does tax withholding mean?” now’s your chance to take care of them. Remember this information (especially the tips on figuring out your specific tax withholding meaning or amount) and you’ll have no trouble filing your taxes.

Do you want to learn more about taxes or money management? If so, check out some of the other articles on our blog. Start with this one on how to avoid a tax audit in 2020.

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The Fortunate Investor
The Fortunate Investor at FortunateInvestor.com
The Fortunate Investor is the finance half of the husband and wife duo behind this website. Michael's finance and investment advice is rooted in an MBA and 20 years experience as an entrepreneur, banker, and manager in the financial services industry.
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