A withholding tax is a tax held by employers from employee paychecks. The tax is then paid to the government (federal and state). Employees are responsible for calculating their withholding tax. Calculating the withholding tax is sometimes as simple as the employee counting their dependents. Other times, it can be more complex. If an individual calculates too much withholding tax, they will likely get a refund for that tax year. This is effectively lending the government an interest-free loan. If the withholdings are too low, an individual may incur an underpayment penalty. For those whose income doesn’t come from an employer (i.e., self-employed), they must pay quarterly taxes.