The History of Income Tax Withholding

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Everything old is new again. The truism was proven correct once more at the end of World War II, when income tax withholding was reinstated.

Reinstated?

That’s right, there’s nothing new about federal income tax withholding. In fact, the concept dates to the Civil War. Back then, to fund the Union’s $2 million daily expenditure, Congress passed the Revenue Act of 1861, which imposed a tax on personal income. In 1862, reforms were added to the Revenue Act, including one requiring taxes to be “withheld at the source” by employers. Withholding was deducted from the salaries of government employees and also from corporate dividends.

Once the war was over and the need for funds declined, the income tax was repealed. In 1872, the federal government returned to collecting tariffs and excise taxes on items such as feathers, telegrams, iron, leather, medicine, whiskey and legal documents.

As time went on, those sources were considered insufficient to support a growing nation, and so in 1913 the Sixteenth Amendment was ratified by the states, once again giving Congress the authority to levy income taxes and withhold the taxes at the source. The withholding provision was withdrawn in 1917—only to be resurrected yet again with the passage of the Current Tax Payment Act of 1943.

That Act provided the system we’re familiar with today: A pay-as-you-go plan of tax collection, where taxes are withheld from paychecks and other sources as income is earned. The Act also included the estimated tax provision that requires quarterly payments on income not covered under withholding-at-the-source such as sole proprietorship business income.

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