Tax is deducted from pay before it is received, but the liability itself is annual. Withholding is an attempt to predict the year's outcome one pay period at a time. Rules differ by jurisdiction.
The system collects against a projection
Each deduction is calculated as though the current pay period were representative of the whole year, then scaled to that period's share of the annual liability.
Where earnings are steady and circumstances unchanged, the projection is accurate and the total deducted lands close to what is owed.
Where earnings vary, the projection is wrong in each period, and the accumulated deductions diverge from the correct figure until something reconciles them.
Codes and allowances carry the personal information
The calculation cannot know a taxpayer's circumstances on its own. A code, allowance figure or declaration supplies the assumptions the employer applies.
Those assumptions cover the tax-free amount, other income the authority knows about, and adjustments carried forward from previous years.
When circumstances change and the declaration does not, deductions continue against stale assumptions, which is the most common source of a large reconciliation.
Multiple income sources break the estimate
Each employer withholds as though it were the only source of income, applying the tax-free portion to the earnings it pays.
With two jobs, the allowance can be applied twice or the wrong band assumed, so the combined deductions understate or overstate the true liability.
Systems handle this by allocating the allowance across sources or by taxing secondary income at a flat rate, and the mechanism differs between jurisdictions.
Irregular payments distort the projection
A bonus paid in a single period makes that period look like a much higher annual income, so the deduction is calculated at rates the full year may not justify.
Cumulative systems correct for this automatically over subsequent periods, while non-cumulative ones leave the correction to the annual filing.
This is why a large deduction on a bonus is often not an error but a timing artefact that resolves later in the year.
A refund is a return of an overpayment
Receiving money back at the end of the year means more was withheld than was owed. The taxpayer lent the difference to the authority without interest.
A shortfall means the reverse, and the amount becomes payable at filing, sometimes with an adjustment to the following year's deductions.
Neither outcome indicates the tax calculated was wrong, only that the estimate was. Anyone whose situation is genuinely complicated should take professional advice for their jurisdiction.