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

Federal withholding is consistent, but it varies by state

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 upon your level of income and other factors. That number is divided by the number of pay periods you have in a year or, in the case of hourly employees, 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 divided by 52.

There's very little difference between state and federal withholding taxes. 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 all U.S. citizens are subject to federal withholding unless they had no tax liability at all in the previous year and they don't expect a tax liability in the current year.
  • Social Security and Medicare taxes are only withheld at the federal level.
  • Federal taxes have seven tax brackets based on an 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.

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.

For most Americans, every paycheck has lines that show federal taxes withheld and state taxes withheld. If you earn $1,000 in a paycheck, but the government withholds $250, you only get to take home $750. The government sends you a tax refund if you had more money withheld than you should have paid in taxes at the end of the year.

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 withholding based on wages earned in that pay period.

The idea behind 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.

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 withheld 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.

Eight states do not have an income tax, so there's no withholding in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire doesn't have withholding, either, because the state taxes only interest and dividend income, not wages.

Key Differences

The federal government withholds Social Security taxes at 6.2%, up to the annual wage base, which is $147,000 in 2022. 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 state-by-state.

Special Considerations

On March 27, 2020, former President Trump signed a $2 trillion coronavirus emergency relief package into law. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, employers (not employees) could defer their share of Social Security taxes through Dec. 31, 2020; 50% of the deferred amount will be due Dec. 31, 2021, and the other half by Dec. 31, 2022.

The law applies to the self-employed too. Certain employers will also be eligible to claim a payroll tax credit for employees they continue to pay who are not working due to the crisis.

Article Sources

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  1. Internal Revenue Service. "Understanding Taxes—Theme 2: Taxes in U.S. History." Accessed Oct. 23, 2021.

  2. Library of Congress. "Income Tax Day." Accessed Oct. 23, 2021.

  3. Internal Revenue Service. "Form W-4." Accessed Oct. 23, 2021.

  4. Tax Foundation. "State Individual Income Tax Rates and Brackets for 2021." Accessed Oct. 23, 2021.

  5. Social Security Administration. "Contribution and Benefit Base." Accessed Oct. 23, 2021.

  6. Social Security Administration. "2022 Social Security Changes," Page 1. Accessed Oct. 23, 2021.

  7. U.S. Congress. "H.R. 748 - CARES Act." Accessed Oct. 23, 2021.