What Are the IRS Withholding Requirements for Different Types of Income?

Introduction

The IRS requires tax withholding on various types of income to ensure taxes are paid throughout the
year. Under IRC § 3402, employers must withhold federal income tax, Social Security, and Medicare
taxes from employee wages. Additionally, self-employed individuals, freelancers, and investors must
make estimated tax payments to avoid penalties.

This guide explains IRS withholding rules for wages, self-employment income, dividends,
retirement distributions, and other income types in 2025.

Types of Income Subject to IRS Withholding

1. Wages and Salaries (IRC § 3402)

•  Employers must withhold:
• Federal income tax (based on Form W-4)
• Social Security tax (6.2% up to $168,600 in 2025)
• Medicare tax (1.45% on all wages, plus an extra 0.9% for high earners)
•  Employees can adjust withholding by filing Form W-4.

2. Self-Employment Income (IRC § 1402)

•  No withholding, but self-employed individuals must pay:
•  Self-employment tax (15.3%) on net earnings
• Quarterly estimated taxes (Form 1040-ES)
• Must report income and expenses on Schedule C (Form 1040).

3. Investment Income (IRC § 3406)

• Banks and brokers must withhold 24% for taxpayers subject to backup withholding.
•  Includes:
•  Dividends and interest (Form 1099-DIV, Form 1099-INT)
•  Capital gains from stock sales (Form 1099-B)

4. Retirement Income (IRC § 3405)

•  Withholding applies to:
•  Pension and annuity payments (Form W-4P)
•  IRA and 401(k) withdrawals (default 10% withholding)
•  Social Security benefits (if income exceeds IRS limits)

5. Gambling Winnings (IRC § 3402(q))

•  Casinos and gaming establishments must withhold 24% federal tax on:
•  Winnings over $5,000 for lotteries and sweepstakes
•  Large slot machine and bingo winnings

6. Foreign Income (IRC § 1441)

• Nonresident aliens are subject to a 30% withholding tax on U.S. income unless reduced by a
  tax treaty.

How to Adjust Your Tax Withholding

Step 1: Review Your Current Withholding

• Check your paycheck stub or Form W-2 to see tax withheld.
• Use the IRS Withholding Estimator to adjust withholding.

Step 2: Update Your Form W-4

•  If too much or too little is withheld, submit a new Form W-4 to your employer.

Step 3: Make Estimated Tax Payments (If Needed)

•  Self-employed individuals and investors should pay quarterly taxes using Form 1040-ES.

IRS Forms & Compliance Checklist

•  Form W-4 – Adjust tax withholding for wages
• Form 1040-ES – Pay estimated taxes
• Form W-4P – Withholding for pensions and annuities
• Form 1099-DIV, 1099-INT, 1099-B – Report investment income

Conclusion

Understanding IRS withholding rules for different types of income helps you avoid tax penalties and
unexpected tax bills. Whether you’re an employee, self-employed, or an investor, adjusting your tax
withholding or making estimated payments ensures compliance with IRS regulations.

For expert tax assistance, schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed tax
professional and IRS representative.

Frequently Asked Questions (FAQs)

1. How do I know if I need to adjust my withholding?

Use the IRS Withholding Estimator or check your latest tax return.

2. Do self-employed people have tax withholding?

No, they must pay estimated taxes quarterly.

3. What happens if I don’t withhold enough taxes?

The IRS may charge penalties and interest for underpayment.

4. Can I request additional withholding from Social Security?

Yes, by filing Form W-4V.

5. What is backup withholding?

A 24% tax on investment income if you fail to provide a correct SSN or TIN.

About Our CPA

Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant and an IRS Enrolled Agent (EA).
He specializes in tax withholding strategies, IRS compliance, and self-employment tax planning.

Schedule a consultation today with Anshul Goyal, CPA, to optimize your tax withholding.