Payroll
Tax Withholding
Income and payroll tax an employer takes out of each paycheck and remits to the government on the employee's behalf.
The U.S. tax system is pay-as-you-go, and withholding is how W-2 employees pay as they go. Each paycheck, the employer deducts federal income tax (based on the employee's Form W-4), the employee's share of FICA, and any state and local income tax, then deposits those amounts with the tax agencies on a strict schedule.
Withholding is a prepayment, not the final tax — the annual return settles up. Where owners get burned is supplemental income: bonuses, RSU vests, and option exercises are typically withheld at a flat federal supplemental rate (22% below $1M) that is far below a high earner's actual marginal rate, producing a large balance due at filing.
Business owners paid on K-1s or Schedule C have no withholding at all — they cover the same obligation through quarterly estimated tax payments. S-corp owner-employees can use extra W-2 withholding late in the year as a planning lever, since withholding is treated as paid evenly through the year regardless of when it happened.
Common pitfalls
- Leaving the W-4 untouched after a raise, a second household income, or large equity vests — the default tables won't keep up
- Assuming the 22% supplemental withholding on a bonus or RSU vest covers the tax — top-bracket earners owe the difference in April
- Missing federal deposit deadlines as an employer — payroll tax deposit penalties escalate fast and the trust-fund recovery penalty reaches owners personally
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