Withholding tax (WHT) is an advance tax deducted at source: when a Nigerian business pays a contractor, consultant or supplier for certain services, it holds back a percentage (commonly 5% for individuals) and remits it to the tax authority as a prepayment of the recipient's income tax.
WHT is not an extra tax, it's a down payment. The contractor still self-assesses their income tax later, and the WHT already deducted counts as a credit against what they owe.
The key payroll distinction: employees get PAYE, contractors get WHT. If someone is on your staff, you deduct PAYE monthly. If they're an independent contractor invoicing you for professional or contract services, you deduct WHT, typically 5% for individuals (10% for some payment categories), and remit it to the relevant tax authority. Getting this classification wrong is expensive: treat a real employee as a contractor and you can be pursued for the back PAYE, pension and penalties.
One relief for small businesses under the WHT regulations now in force: small companies are exempt from deducting WHT on transactions of ₦2 million or below, where the supplier has a valid Tax Identification Number (TIN).
Nigerian example: a Lagos startup pays a freelance designer ₦500,000 for a branding project. If WHT applies, it pays the designer ₦475,000, remits ₦25,000 (5%) as WHT, and gives the designer a credit note to use against her own tax assessment.
For how employee-side deductions work instead, see PAYE and statutory deductions in Nigeria.