Your employer is required by the government to withhold a portion of the tax you owe each time you get paid. This cash flow ensures the government has enough money to maintain our states, cities, counties and other districts. Your taxes help to fund many things, including highways, streets, buildings, state parks and so much more.
Your employer is only permitted to withhold taxes from income you earn while working for them. However, if nothing is withheld you may be required to make estimated payments of up to 4 times annually to cover 100 percent of what you paid the previous year, or at least 90 percent of what you'll owe for the current year. For example, your employer could not withhold taxes for unemployment benefits, alimony, self-employment income and investment income.
The amount of tax your employer withholds is determined based upon the information that you provided within your IRS Form W-4. The W-4 allows you to select your filing status and the number of allowances you want to withhold. Typically, allowances are based upon the number of household dependants. For example, if you were single with no dependents you might claim only one allowance. However, there are other reasons why you might claim more than one allowance, such as real estate, a second job or some other investment. Ideally, based upon your W-4 selections, you will not owe anything in taxes at the end of the year. If you have overpaid, then the federal government and possibly state government will owe you money and you will receive a refund. If you have underpaid then you will owe the federal and/or state government. You should try to avoid this.
For more information on IRS Form W-4, click here.