Withholding

What it means

When you get paid, the government requires you to pay income tax on that money. To make this easier, your employer acts as a middleman. They take a portion of your pay before it reaches your bank account and send it directly to the IRS and your state to cover your tax bill.

This system treats the money as if you paid your taxes steadily throughout the entire year. It helps you stay current with the government so you do not owe a huge, unexpected tax bill when you file your return in the spring.

A simple example

Imagine Sarah works at a company and receives 100 RSUs (Restricted Stock Units, which are promises of company stock). When they vest (officially become hers), they are worth $1,000 total. Because this counts as income, her employer must withhold tax. If the tax rate is 20%, her employer keeps $200 worth of stock to pay the government. Sarah receives the remaining $800 in stock in her brokerage account.

Why it matters to you

• It keeps you from owing a large, surprise tax bill at the end of the year.
• It automates your tax payments so you do not have to calculate them yourself.
• Some stock sales or specific stock types do not have money taken out automatically, which means you might need to plan ahead.

Common mistakes to avoid

• Assuming taxes are already paid on all stock sales, when some may require you to pay later.
• Failing to save cash for taxes on trades where your company did not withhold money.
• Forgetting that if you do not pay enough tax during the year, you might face a penalty. A tax professional can help if you are unsure.

Words used on this page

• RSU: A gift of company stock that you earn over time.
• Vest: The moment when your company stock officially becomes yours to keep.
• Withholding: The tax money your employer holds back from your pay to send to the IRS.
• Income tax: Money you pay to the government based on what you earn.