A state tax identification number (or withholding tax) refers to the tax that employers deduct from employees’ wages each pay period. This deduction is based on the employee’s earnings and the number of dependents they claim. The withheld amount is used to determine whether the employee will receive a tax refund or owe additional taxes at the end of the tax year.

Tax withholding is mandatory for income payers and primarily applies to employment income. However, it can also extend to other types of income, such as interest payments, dividends, royalties, rents, and real estate sales, depending on the jurisdiction. Governments implement tax withholding to prevent tax evasion and may impose additional requirements in specific circumstances.