Reviewed by Aug 27, 2020| Updated on
Overwithholding is a term which generally refers to a surfeit amount of tax being deducted from the paycheck of an employee for contributing towards a retirement scheme over the progression of a year. The amount of overwithholding is refunded to the taxpayers when they go onto file their income tax return.
Breaking Down Overwithholding
Overwithholding is also referred to as excess withholding. Overwithholding, when referring to the income tax, usually happens when the taxpayers receive a bonus and above-average income that increase their overall income in a tax year. The taxpayers are refunded their overwithheld amount in the form of a tax credit.
There are two reasons social security is overwithheld.
1) Taxpayers have worked under multiple employers over a tax year, and there was a miscommunication between them.
2) The employer has made an error on the extent of withholding that they actually should have made.
In the U.S., the internal revenue code (IRC) has set the maximum level of the amount that can be withheld from the paychecks of employees towards social security over a tax year.
The problem of overwithholding arises when an employee changes his or her employer over the course of the tax year. The new employer, who does not have the information about the contribution made by an employee in his or her paycheck through the previous employer, will go onto deduct a higher sum from the employee’s paycheck.
How to Avoid Overwithholding?
The amount overwithheld will later be refunded after processing the income tax returns filed by the taxpayers. However, this is not the best practice as there will not be any interest paid on the amount withheld and hence, it doesn’t make sense to let employers overwithhold from the paycheck for social security contributions. Employees must check their payslip regularly for the amount deducted and should inform their employers if their limit is reached.