Withholding Tax Explained: Everything You Need to Know

Withholding tax is a mandatory deduction that employers or entities make from payments such as salaries, dividends, interest, or royalties before transferring the remaining amount to the recipient. This system ensures that the government collects taxes in advance rather than waiting for individuals or businesses to report earnings. Typically, withholding tax applies to employees' wages, foreign transactions, and specific service payments. The deducted amount is later adjusted when the taxpayer files an income tax return, ensuring compliance with tax laws. Withholding tax plays a crucial role in maintaining a steady revenue stream for governments, preventing tax evasion, and easing the tax burden on individuals.