Overwithholding

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Overwithholding

Deducting and paying too much tax that may be refunded to the taxpayer or applied against the next period's obligation.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Overwithholding

A situation in which an employer withholds too much money from an employee's paycheck and gives the funds to the tax agency. This occurs when the employee does not make enough to qualify for the tax bracket used on the paycheck, or when the employee takes enough itemized deductions for which the withholding does not account to reduce his/her tax liability. Overwithholding usually results in a tax refund or in the application of the amount to next year's taxation.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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But for the most part, the government's wage withholding proxies are successful in achieving their desired goal: approximating tax liability and slightly over-withholding. (151)
Using a profit ratio of 40 percent instead of 30 percent to calculate withholding for gig workers could result in over-withholding for some of those workers, which may or may not be desirable (as discussed further below).
But it is possible that some taxpayers at the bottom of one bracket would be moved to a lower bracket by virtue of the section 199A deduction, and not accounting for this could result in significant over-withholding. (169)
(170) In fact, not accounting for every deduction is largely how the IRS wage withholding tables achieve over-withholding for the majority of taxpayers, providing the highly popular tax refund.
Adding only one allowance to Paul's W-4 may still result in over-withholding and make for a financially strained year.
In order to prevent over-withholding in some cases, the law permits an employee who has unusually large excess itemized deductions to claim one or more additional exemptions.
Do you know that over-withholding is like making an interest free loan to the IRS?
However, application of this ruling could also lead to over-withholding in many instances.
Does over-withholding and getting a refund in this manner make sense financially?
This strategy can be especially unappealing if your over-withholding results from a major change in your life.