In the United States, individuals earning income are subject to income tax on their earnings. This income tax is withheld from earnings paid to the individual by their employer. This is called Withholding Tax. Essentially the US government collects a portion of the individual’s income as tax before the individual is paid by their employer. The income that is withheld is paid directly to the US government as income tax on behalf of the individual. This makes it easier for the IRS to collect taxes due (rather than having to chase individuals for taxes after their paid) and ensures that income taxes are paid to the government throughout the year.

Here’s an example of how withholding tax works:

• John earns $1000 in January
• John owes 10% of his earnings as income tax. John’s employer withholds $100 from John’s paycheck ($1000 x 10% = $100).
• John’s employer pays the US government $100 for John’s income tax
• John’s employer pays John $900

Foreigners may be subject to US withholding tax as well. For example, those investing in the EB-5 immigrant investor program are subject to withholding tax on their limited partnership distributions. For EB-5 investors, the limited partnership withholds income tax from distributions and sends that money directly to the US government to satisfy the tax obligations of the investors. LPs must have Individual Taxpayer Identification Numbers (ITINs) for each investor so they can correctly pay each investor’s income tax to the US government. Without an ITIN, investors or the LPS could be penalized for failing to pay their taxes.