Withholding is the money that employers take out of their employees’ paychecks for federal income tax, social security and Medicare taxes, and state and local income taxes in certain areas. This money is deposited with the government and will be credited against your tax liability when you file taxes. The amount withheld from your paychecks is listed on the W-2 [Wage and Tax Statement] you receive from your employer after the end of the tax year.
You can adjust how much money is withheld from your paychecks using Form W-4 [Employee’s Withholding Allowance Certificate]. Use the IRS’s Withholding Calculator to make sure neither too much nor too little money is being withheld from your paychecks.
Withholding is also taken out of pensions, bonuses, commissions, and gambling winnings.
Money is not taken out of the paychecks of the self-employed. Instead of withholding, they have to make estimated tax payments to the IRS on a quarterly basis.