What Is Withholding Tax? Overview, Types & How to Calculate It

By Frank Bass – Updated Mar 5, 2025 at 12:12 PM

Key Points

Withholding tax is deducted from employee wages to prepay state and federal taxes.
Different types apply, including for income, Social Security, and Medicare.
To calculate, adjust for allowances and use IRS tax tables based on income and status.

Ever wonder why you have money taken out of your paycheck every week and you’re still having to send a big check to Uncle Sam in mid-April? The answer is withholding. It’s a simple concept, but like everything else to do with the U.S. tax code, it can be complicated. Read on to learn more about withholding, including the types of withholding and how you can best estimate your withholding tax for the year.

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Hands pulling a paycheck out of an envelope. — Image source: Getty Images.

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What are withholding taxes?

Simply put, a withholding tax is the amount of money that goes immediately from your paycheck into Uncle Sam’s pocket. Employers are required to set aside money from your paycheck for federal income taxes (also for Medicare and Social Security, but those are separate taxes). You still have some say over how much gets deducted, though.

Withholding is far from an exact science. Ask your employer to withhold too much, and you’re making an interest-free loan to the federal government. Ask your employer to withhold too little, and you’re potentially looking at a big tax bill.

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About the Author

Frank Bass is a contributing Motley Fool stock market analyst and editor covering energy, healthcare, consumer, and financial sectors. Frank has decades of experience in financial journalism, holding reporting and editing roles at The Wall Street Journal, The Associated Press, and Bloomberg. He also currently edits research on the global energy transition. He holds a bachelor’s degree in journalism from Texas Tech University and is a graduate student at the University of Alaska Fairbanks. Fun Facts: Frank has hiked The Long Trail in Vermont from end to end, and currently lives in a semi-dry cabin in Interior Alaska.

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