Understanding Withholding Tax: A Guide for Payers and Payees

Withholding tax is a type of tax that is deducted from the payment made to non-resident individuals or companies. The payer, typically a resident individual or company, is required to withhold a certain percentage of the payment and remit it to the government on behalf of the payee.
The purpose of withholding tax is to ensure that the non-resident payee pays tax on the income they earn in the country, even if they do not have a physical presence there. This helps to prevent tax evasion and ensures that the non-resident payee does not avoid paying taxes on their income.
Withholders are individuals or companies that make payments to non-resident individuals or companies and are required to withhold tax on those payments. Withholders may include employers, contractors, freelancers, and other individuals or businesses that make payments to non-resident workers or vendors.
For example, if a US company hires a Canadian consultant to provide services, the US company is considered the withholder and must withhold a certain percentage of the payment and remit it to the IRS on behalf of the Canadian consultant. The withheld tax amount is then credited against the consultant's tax liability when they file their tax return.