Many taxpayers are subject to tax withholding, and this happens at different levels and for different types of income. As this is a very broad category of taxation, there isn’t a single type of tax withholding.
Overall we can say that there are three types of tax withholding. These different levels of taxation or, in other words, tax withholding, are not subject to all income.
Tax withholding from ordinary income
There is federal income tax withholding from regular income like wages, salaries, self-employment income, interest income, income from investments, and so on. This is pretty much all US citizens and US persons.
Withholding from payments to foreign persons
Other than taxes to US citizens and persons, there are tax withholdings for payments to foreign persons. Although this happens at a minimum rate, it’s the second type of tax withholding you should keep in mind.
Last but not least, there is the backup withholding. This is somewhat a tricky type of withholding that occurs in certain situations.
For example, all taxpayers are required to provide their taxpayer identification number and their personal information for tax purposes. Say you’re a contractor and received payments from a company. By law, you are required to submit your taxpayer identification number. If you don’t abide by this, you’ll be subject to backup withholding, where the payer withholds a portion of your earnings and forwards the proceeds to the Internal Revenue Service.
How to stop tax withholding?
Stopping tax withholding isn’t something that’s in your control. At the very least, you can stop the federal income taxes withheld from your wages. Though this should happen if you no longer need to pay taxes, be cautious nonetheless.
There is an underpayment penalty for taxpayers who don’t pay at least 90 percent of what they owe during the tax year. Additionally, misusing Form W-4 leads to a monetary penalty of $500 per violation. It’s best not to abuse it and provide your employer with wrong information to claim exempt status where you clearly need to pay more taxes to meet what you owe.
How do self-employed people pay taxes?
The short answer is not through withholding. Self-employed folks need to estimate how much they owe for the period, usually the quarter, and pay taxes accordingly. Learn more about estimated tax payments.