Net pay and withholding liabilities Payroll withholdings include required and voluntary deductions authorized by each employee. Withheld amounts represent liabilities, as the company must pay the amounts withheld to the appropriate third party. The amounts do not represent expenses of the employer. The employer is simply acting as an intermediary, collecting money from employees and passing it on to third parties. Required deductions. These deductions are made for federal income taxes, and when applicable, state and local income taxes. The amounts withheld are based on an employee's earnings and designated withholding allowances. Withholding allowances are usually based on the number of exemptions an employee will claim on his/her income tax return, but may be adjusted based on the employee's estimated income tax liability. The employee is required to complete a W-4 form
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