Income Tax in United States is ‘Pay-as-you-earn’ or more widely known as PAYE tax. It means tax is supposed to be paid in accordance and receipt of earnings. There are different forms of income tax based upon who is going to receive it, for example, Federal Income Tax and State Income Tax. In a general practice, income tax is paid by two core methods, called as Withholding and Estimated Tax.

Withholding:

The amount of income tax, in part or full, is withheld from salary and cites withholding as an efficient way to collect tax. Initially Withholding Tax is kept by employer, and the amount so withheld, then, is paid to Internal Revenue Service (IRS). The amount so withheld may include Federal Income Tax, Social Security Tax, and Medicare Tax. Withholding Tax can be collected out of salary, wages, pension, annuity, gambling winning, tips, fringe benefits (those taxable), sick pay and few more specified incomes.

Now the question may strike that what determines the amount accounting withholding tax? There are quite a few factors which can be pointed out, like earnings, withholding allowances (if any) and sometimes, even employee desires to increase such amount. With the help of form W-4 filled by an employee, employer figures out the amount of withholding. W-4 contains the information, furnished by employee, on account of rate of withholding (whether single or lower married rate), willingness to keep extra amount as withholding, allowances and exemptions claimed thereon.

Estimated Tax:

A salaried person may have other incomes than salary like, interest on deposits, dividend on securities, rent, and capital gains. In such circumstances amount withheld by employer will not match the tax liabilities or a self-employed person doesn’t even come on the screen of withholding tax. In such cases the amount of tax on income (not subject to withholding) is to be paid and called as Estimated Tax. It can be paid electronically or through checks or money order. A couple can make joint or separate estimated tax payment (as the case may be). In order to figure out estimated tax considering taxable income, deductions and credits is admirable.

The due dates for payment of estimated tax are April 15, June 15, September 15, and January 15 for income fetched during January 1 to March 31, April 1 to May 31, June 1to August 31, September 1 to December 31 respectively.

Income Tax is thus the combination of Withholding and Estimated Tax. The preposition ‘pay-as-you-earn’ makes United States’ taxation structure much proficient.