Final answer:
The 'federal income tax withheld' on a W-2 form represents the amount of money an employer has deducted from an employee's paycheck for federal taxes throughout the year, determined by information provided in the employee's W-4 form.
Step-by-step explanation:
Federal income tax withheld in box 2 of a W-2 indicates the total amount of federal income tax that an employer has withheld from your paychecks throughout the year. When you start a job, you typically fill out a W-4 form, which gives your employer the information needed to determine how much federal income tax to withhold from your earnings based on your income, filing status, and other factors.
This withholding process relates to the pay-as-you-earn system instituted by the Revenue Act of 1942, ensuring taxes are spread throughout the year rather than having a large sum due at tax time. The amount withheld is sent directly to the Internal Revenue Service (IRS), and this pre-payment toward your annual tax liability helps avoid underpayment penalties and significant year-end tax bills.
Payroll taxes like FICA contribute to social security and other benefits and are also withheld from your paycheck. At the end of the fiscal year, you must file a tax return to reconcile the total tax you owe against what has already been paid through withholdings. If too much has been withheld, you may be eligible for a refund, but if too little has been withheld, you may owe additional taxes.