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Withholding tax

Withholding tax is a deduction from each employee's paycheck to create a pay as you go system to collect annual income tax.

Expanded Definition

The funds withheld are collected by the employer and forwarded to the IRS in the case of Federal withholding, but state and local government may have their own withholding programs to collect their income taxes. The total amount withheld is reported on the annual W-2 form, which is filed with your income tax return allowing you to claim credit for the funds withheld, and in the case of overpayment, request a tax refund.

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