Federal Withholding Tax vs. State Withholding Tax: What's the Difference?

Federal withholding is consistent, but state withholding varies by where you live

Federal Withholding Tax vs. State Withholding Tax: An Overview

In simplest terms, the amount of withholding from your paycheck is an estimate of how much you'll owe in taxes at year's end based on your level of income and other factors. That number is divided by the number of pay periods you have in a year. In the case of hourly employees, it's divided by how many hours you work in a pay period.

If it's likely that you'll owe the government $10,000 and you're paid a weekly salary, $192.30 will be withheld from each of your paychecks and forwarded to the government on your behalf ($10,000 in taxes divided by 52 weeks).

There's very little difference between how state and federal withholding works. The chief distinction is that state withholding is based on state-level taxable income, while federal withholding is based on federal taxable dollars. State withholding rules tend to vary among the states, while federal withholding rules are consistent everywhere throughout the United States.

Key Takeaways

  • States can only withhold amounts for their own income taxes, and not all states impose them.
  • Virtually everyone who receives a paycheck are subject to federal withholding unless they had no tax liability at all in the previous year and don't expect any in the current year.
  • Social Security and Medicare taxes are only withheld at the federal level.
  • Federal taxes have seven tax brackets based on annual income.
  • You may file your taxes as single, married, or head-of-household.

Federal Withholding Tax

The modern tax withholding system was introduced in the 1940s to fund military operations during World War II. It expedited the tax collection process and made it easier for governments to raise additional taxes without most taxpayers becoming aware of it. Withholding also meant income taxes were paid automatically for most people, which increased the number of taxpayers making income tax payments.

Before the withholding system was implemented, income taxes were due at a specific time of year, initially in March. Taxpayers had to pay in full on that date, which made them keenly aware of their tax burden. When taxpayers have their taxes automatically deducted throughout the year through withholding, they don't feel the big bite all at once. Having some tax withheld from each paycheck also spreads out the tax burden throughout the year and makes it easier to pay for many people. When taxpayers are required to pay a large lump sum, they must budget and save for that payment, which can be challenging.

For most Americans, every paycheck has lines showing federal and state taxes withheld. If you earn $1,000 in a paycheck, but the government withholds $250, you take home $750. When you file your tax return, the government sends you a tax refund if you had more money withheld than you should have paid in taxes that year.

If you aren't an employee and receive a 1099 instead of a W-2 form at the end of the tax year, you won't have income taxes withheld. Instead, you will need to make quarterly estimated tax payments.

Employees provide their personal information, including marital status and number of dependents, to employers on Form W-4. Employers then use these guidelines to determine the withholding amount based on wages earned in that pay period.

The goal of withholding is to get the amount as close as possible to what you'll ultimately owe at the end of the year in taxes so you won't owe anything more or have more withheld than you should have.

State Withholding Tax

Both state and local governments can impose withholding on wage income, but they can only do so based on their own tax rates. You can have both state and federal income taxes withheld, but you cannot have state taxes and federal taxes withheld twice at both levels.

State withholding works the same way as federal withholding for income tax, but states have their own versions of Form W-4.

Nine states do not have a personal income tax, so there's no state withholding in:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Tennessee
  • Texas
  • New Hampshire
  • Washington
  • Wyoming

However, Washington State does have a capital gains tax, and New Hampshire taxes interest and dividend income.

Key Differences

The federal government withholds Social Security taxes at 6.2%, up to the annual wage base, which is $160,200 in 2023 (rising to 168,600 in 2024). You do not have to pay Social Security on the income you earn above this threshold, and the rate is the same for all employees up to this income limit.

Medicare tax is withheld at a flat 1.45%, but if you earn more than $200,000, a 0.9% additional Medicare tax applies. Employers must match Social Security and Medicare payments for an additional 7.65% paid to the federal government.

Social Security and Medicare are not withheld at the state level and state withholdings vary by state.

If you have deductions taken out of your paycheck for tax-advantaged savings accounts, such as an HSA or a 401(k), these contributions aren't subject to withholding.

How Much Is Federal and State Tax?

Federal tax is consistent across the board and made up of tax brackets. Specific bands of income correspond to a specific tax rate. This is a progressive tax. For the U.S., the federal tax ranges from 10% to 37%. State taxes vary by state, with some states not having a tax.

What Happens If No Federal Income Tax Is Taken Out of My Paycheck?

If no federal income tax is taken out of your paycheck, it could be that an error was made. Most individuals will have to pay federal taxes. Some people are exempt from paying federal tax, based on how much they earn or their age, for example. In this case, you would not have federal tax taken out of your paycheck.

What State Has the Highest Tax?

California has the highest state tax rate with the highest income tax in the state set at 13.30%.

The Bottom Line

Withholding for both state and federal taxes is a portion taken out of your paycheck to pay federal and state income tax. The goal of withholding is that when you file your tax return for the year, you will not have to pay any additional income tax. Depending on your financial circumstances, however, you may need to make additional payments. You may also find that too much was withheld from your paycheck, and you are owed a tax refund.

Federal income tax withholding is broken down into two parts, a portion for Social Security and a portion for Medicare. State withholding depends on the state you live in and what programs are supported by tax dollars.

Article Sources
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  1. Ernst & Young, LLP. "2023 State Supplemental, Flat Tax and Highest Income Tax Withholding Rates with Hyperlinks to the Latest Withholding Tables/Instructions (as of January 9, 2023)." Download PDF.

  2. Internal Revenue Service. "Publication 505, Tax Withholding and Estimated Tax," Pages 2-11.

  3. Internal Revenue Service. "Understanding Taxes—Theme 2: Taxes in U.S. History."

  4. Library of Congress. "Income Tax Day."

  5. Internal Revenue Service. "Frequently Asked Questions: 1099-MISC, Independent Contractors, and Self-Employed," Select "Must I file quarterly forms to report income as an independent contractor?"

  6. Internal Revenue Service. "Topic No. 753, Form W-4 – Employee's Withholding Certificate."

  7. The Tax Foundation. "State Individual Income Tax Rates and Brackets for 2023."

  8. Social Security Administration. "Contribution and Benefit Base."

  9. Internal Revenue Service. "Topic No. 751, Social Security and Medicare Withholding Rates."

  10. Internal Revenue Service. "401(k) Plan Overview."

  11. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans," Page 3.

  12. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2024."

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