Withholding: A Down Payment, not a Tax
In my experience, many people do not know the difference between the withholding amount (the taxes deducted on your pay stub) and their tax liability. All they know is that they don’t have the money. They think they’re square with the government, and are surprised if they owe any amount on top of what was withheld. That’s why I thought it would be useful to review the difference between withholding and actual taxes.
The withholding amount on your paystub is merely a down payment on your eventual tax bill.
The US did not withhold taxes from people until 1943. A publication from the Treasury Department explains it better than I can:
[Withholding] greatly eased the collection of the tax for both the taxpayer and the Bureau of Internal Revenue. However, it also greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future.
"History of the U.S. Tax System". U.S. Department of Treasury. Archived from the original on 2010-12-04. Retrieved 2010-12-04.
Your withholding amount is based on your wages and how often you get paid. The amount can be adjusted by changing the number of dependents on your W-4 form. The number of dependents you claim can be adjusted at any time.
To find out if the amount you’re withholding is likely to cover your tax bill, the IRS has a Withholding Calculator that can help you figure it out — or you can contact me with any questions.