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A tax levied at a standard rate on all receipts of income from wages or dividends, regardless of the individual’s tax liability. Taxpayers then make tax returns so that their tax liability can be determined. Those liable to pay less than the withholding tax, for example because of low total incomes, then receive tax refunds, while those liable to pay more get tax demands for the excess. This system helps the tax authorities as they ensure the receipt of revenue, and taxpayers entitled to refunds have a strong incentive to file their tax returns promptly. It is disadvantageous for taxpayers, who get their refunds in arrears: it does, however, protect them from the danger that they may have spent too much of their income before the tax bill arrives. The US income tax system makes use of withholding taxes.
Reference: Oxford Press Dictonary of Economics, 5th edt.
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