Month End Glossary

Withholding Tax

Withholding tax is a government-mandated levy deducted by employers from employees’ income to fulfill tax obligations directly on behalf of the taxpayer.

Withholding tax refers to the practice of deducting a portion of an individual’s income, typically salary or wages, directly by an employer before disbursing the rest of the income to the individual. The withheld amount is transferred to the relevant tax authorities as an upfront payment of the individual’s tax liability. This system ensures that taxes are collected efficiently and regularly without waiting for annual filing periods, helping taxpayers meet their tax obligations incrementally and reducing the potential for end-of-year liabilities.

In a sentence, one could say, "The company is responsible for applying withholding tax to employees' wages and remitting it to the government." Many countries use a withholding tax system for payroll, and the rules governing the calculations and rates often depend on factors like income level, marital status, and exemptions. By managing withholding tax properly, both employers and employees can achieve compliance with tax laws and avoid complications.

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