What is withholding tax?
Withholding tax is tax that the payer deducts from a payment at source and pays to the tax authority on behalf of the recipient. In payroll, employers withhold income tax and usually social security from employees’ wages. Withholding tax also applies to some payments abroad, such as dividends, interest, royalties and certain service fees paid to non-residents.
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The employer acts as a collection agent for the tax authority. Each pay period it:
- Works out taxable pay from salary, overtime, bonuses and taxable benefits.
- Applies the employee’s tax information, such as a W-4 in the United States, a tax code in the UK or a tax class in Germany, using the employee’s tax identification number.
- Deducts income tax and employee social security from gross pay.
- Pays the amounts withheld, plus any employer contributions, to the authorities by the deadline.
- Reports the figures in periodic returns and an annual certificate for each employee.
The tax withheld belongs to the government from the moment it is deducted. Employers that withhold but fail to pay it over face penalties and, in many countries, personal liability for directors.
Payroll withholding by country
| Country | System | What is withheld |
|---|---|---|
| United States | Federal income tax withholding plus FICA | Income tax based on Form W-4. Employee Social Security of 6.2% up to $184,500 in 2026 and Medicare of 1.45%. State and local income tax where they apply. |
| United Kingdom | PAYE | Income tax by tax code plus employee National Insurance of 8% between £12,570 and £50,270 a year and 2% above. Reported to HMRC on or before each payday. |
| India | TDS on salary | Under section 392 of the Income Tax Act, 2025, in force since 1 April 2026. Quarterly return on Form 138 and annual certificate on Form 130. The employer needs a TAN. |
| Germany | Lohnsteuer | Wage tax, solidarity surcharge and church tax, based on the employee’s tax data (ELStAM). Declared and paid by the 10th day after each period. |
| Canada | Source deductions | Income tax, Canada Pension Plan and Employment Insurance, remitted to the Canada Revenue Agency. |
| Australia | PAYG withholding | Withheld according to the employee’s Tax File Number declaration. |
| Philippines | Withholding tax on compensation | Withheld and remitted to the Bureau of Internal Revenue. |
Figures checked in November 2026 against official sources listed at the end of this page.
Withholding tax on cross-border payments
Many countries charge withholding tax on payments to non-residents. The United States, for example, generally withholds 30% on US-source fixed or periodic income paid to non-resident aliens, such as interest, dividends and royalties, unless a tax treaty reduces the rate. To claim a treaty rate, the recipient gives the payer a form such as the W-8BEN.
Under US rules, pay for services is sourced where the work is done. A US company paying a contractor for work done entirely outside the United States generally does not withhold US tax, but it still collects a W-8BEN to document that the contractor is foreign. Other countries apply different source rules, and some charge withholding tax on fees for services paid to non-residents, so cross-border contractor payments need checking in both countries.
Withholding tax vs final tax
Payroll withholding is usually a prepayment. At the end of the tax year, the employee’s actual liability is settled through a tax return or an employer adjustment, and too much or too little withholding leads to a refund or a balance to pay. In some systems, such as PAYE in the UK, withholding is designed to collect the right amount through the year, so most employees never file a return. Withholding on some payments to non-residents is a final tax with no return at all.
Common withholding mistakes
- Missing or invalid employee tax numbers, which can force a higher rate.
- Treating taxable benefits, bonuses or allowances as tax-free.
- Not withholding in the country where the employee actually works, for example for remote employees abroad.
- Paying withheld tax late, which triggers interest and penalties even when the amount is right.
How TopSource handles withholding
Our global payroll team calculates, withholds and pays income tax and social security in each country where you have an entity, and our Employer of Record service does the same for employees we employ on your behalf, including the periodic returns and annual certificates.
Frequently asked questions
What does withholding tax mean?
It means the payer deducts tax from a payment before paying it and sends that tax to the government on the recipient’s behalf. Employers do this with income tax on salaries.
Is withholding tax the same as income tax?
No. Withholding is a way of collecting tax, usually income tax, at source. The amount withheld is credited against the recipient’s final income tax bill.
Who pays withholding tax, the employer or the employee?
The employee bears it, because it comes out of their pay. The employer is responsible for deducting it correctly and paying it to the authorities on time.
Do I have to withhold tax for a remote employee in another country?
Usually you must withhold in the country where the employee works, which normally requires being registered as an employer there, through your own entity or an Employer of Record.
Is withholding tax refundable?
If more is withheld than the final tax due, the difference is normally refunded or credited when the employee files a return or the employer makes a year-end adjustment.