Free Tax Course

Mandatory Tax Withholding

What is mandatory tax withholding?

Taxes must generally be withheld from wages, from some gambling winnings and in certain cases from interest and dividend payments. For some types of required withholding, the withholding rate is also set by law.

Salaries and Wages

Your employer withholds the tax you owe on your wages or other employee compensation. If you are an employee, your employer usually must withhold income tax from your pay unless you expect to have no tax liability. In this case, you may claim an exemption from withholding.

Federal income tax your employer is required to withhold from your pay is based on the amount you earn and the information you provide on Form W-4, Employee's Withholding Allowance Certificate. You must complete a Form W-4 when starting a new job.

Gambling Winnings

Certain types of gambling winnings are also subject to mandatory tax withholding. In general, tax will be withheld from winnings of more than $5,000. It does not matter if the winnings are paid in cash, in property or as an annuity. If your gambling winnings exceed $5,000, the entire amount you won is subject to tax withholding. Gambling winnings from bingo, keno, and slot machines generally are not subject to income tax withholding.

Generally, if you receive $600 or more in gambling winnings, the payer is required to issue you a Form W-2G, Certain Gambling Winnings. If your winnings are subject to mandatory withholding, the amount will be shown in box 2 of Form W-2G. Add the amount in box 2 of Form W-2G to the withholding sown on your W-2 forms and enter the total on line 64 of the form 1040.

Note: add the amount of gambling withholding in box 2 of W-2G form to the federal income tax withholding on the W-2 form and then entered on line 64 of 1040 form as total federal income tax withheld.

Interest and Dividends

Interest and dividend income is generally not subject to withholding. However, if you fail to give the payer (the bank, mutual fund, etc.) your social security number or if you give an incorrect social security number, the payments are subject to mandatory withholding. This is also called 'backup withholding'. Backup withholding will be shown in box 4 of Form 1099-INT or Form 1099 DIV. Add the amount i box 4 to the withholding shown on your W-2 forms and enter the total on line 64 of form 1040.



Looking for more IRS Deductions?