What is withholding tax?

Withholding tax refers to the amount of money that an employer deducts from an employee's wages before they receive their paycheck. This deduction is intended for various taxes owed to the government, such as federal income tax, state tax, and Social Security contributions. By withholding this amount, the employer helps ensure that employees pay their taxes gradually throughout the year, rather than in a lump sum when filing their tax returns. This mechanism aids in compliance with tax obligations and assists individuals in managing their tax liabilities more effectively throughout the year.

The other choices relate to different aspects of employment compensation and employee contributions, but they do not accurately describe withholding tax as it specifically pertains to tax deductions made at the source of income.