Withholding Tax

Withholding tax is an amount that an employer or payer of income withholds or deducts from the payments made to an employee or payee, and pays directly to the government on behalf of the payee.

This method of tax collection is commonly used in many countries, including the United States, to ensure timely tax payments to the government. The amounts withheld often count toward the income tax that the employee or payee must pay during the year.

Withholding taxes can apply to employment income, payments of interest or dividends, and other types of payments. The exact rates and rules for withholding taxes depend on the laws of the country in which the income is being earned or where the payee resides.

In the context of the Foreign Account Tax Compliance Act (FATCA), withholding tax refers to the 30% tax that foreign financial institutions may have to withhold on U.S. source income if they, or their account holders, are not compliant with FATCA requirements.