Question

Discuss the importance of correctly calculating income tax withholding and the possible problems with miscalculating it for the employee and the employer.

Answer 1

Income tax withholding is a concept in which employer deduct tax of employees on their salary and deposit the same with Revenue Authorities.It is an obligation on employer to calculate correctly the income tax withholdings by applying the relevant provisions.

Importance of Correct Calculation:

i) Goverment should get the actual Revenue: By calaculating correct withholding tax employer may ensure that no shortage of revenue is deposited with the government.

ii) Excess tax of employees is not deducted: It also to be ensured that employer has not deducted excess tax from the salary of employees.

2.Possible Problems:

i) Violation of regulations/Law: Wrong calculation may lead to violation of law and penal provisions may apply.

ii) Employees has to pay tax : In case short deduction at the end of employer, employee needs to pay taxes at the end of the year with penal interest.

iii) Excess Cash outflow of employer in the form of penal interest

iv) Expense may not be allowed while computing income of employer.