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

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

Federal Withholding Tax vs. State Withholding Tax: An Overview

Simply put, the amount withheld from your paycheck is an estimate of how much you’ll owe in taxes at the end of the year based on your income and other criteria. That figure is divided by the number of pay periods in a year or, in the case of hourly workers, by the number of hours worked in a pay period.

If you’re paid weekly and you’re likely to owe the government $10,000, $192.30 will be withheld from each of your paychecks and remitted to the government on your behalf: $10,000 divided by 52.

The distinction between state and federal withholding taxes is minimal. The main contrast is that state withholding is calculated on the basis of state-level taxable income, while federal withholding is calculated on the basis of federal taxable dollars. State withholding standards differ per state, however federal withholding rules are constant across the United States.

Key Takeaways

  • States may only withdraw sums for their own income taxes, which are not imposed in all states.
  • Unless they had no tax burden in the previous year and do not anticipate to have any in the current year, almost all U.S. citizens are liable to federal withholding.
  • Only federal Social Security and Medicare taxes are withheld.
  • The federal government has seven tax bands depending on yearly income.
  • You may file as single, married, or head of household.

Federal Withholding Tax

The contemporary tax withholding system was implemented in the 1940s to pay World War II military activities. It sped up tax collection and made it simpler for governments to increase new taxes without most people realizing it.

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Prior to the implementation of the withholding system, income taxes were payable at a set period of year, first in March. Taxpayers were required to pay in full on that day, making them acutely conscious of their tax burden. When individuals have their taxes withheld routinely throughout the year, they may not experience the full impact all at once.

Every paycheck for the majority of Americans includes lines that reflect federal and state taxes withheld. If you make $1,000 in a paycheck but the government deducts $250, you only receive $750. If you had more money withheld than you should have paid in taxes at the end of the year, the government will issue you a tax refund.

On Form W-4, employees supply employers with personal information such as marital status and number of dependents. Employers then use these standards to calculate withholding based on earnings received during that pay period.

The goal of withholding is to come as near to what you’ll owe in taxes at the end of the year as possible so you don’t owe anything extra.

State Withholding Tax

State and municipal governments may also impose withholding on wage income, but only on the basis of their own tax rates. You may have both state and federal income taxes withheld, but you cannot have both state and federal taxes withheld at the same time.

State withholding operates in the same manner as federal withholding for income tax, except each state has its own Form W-4.

Because Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not have an income tax, there is no withholding. New Hampshire also does not have withholding since the state solely taxes interest and dividend income, not wages.

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Key Differences

The federal government withholds 6.2% of Social Security taxes, up to the annual salary base in 2022, which is $147,000. You are not required to pay Social Security on earnings over this barrier, and the rate is the same for all workers up to this limit.

The Medicare tax is deducted at a fixed rate of 1.45%, however if you earn more than $200,000, an extra 0.9% Medicare tax is levied. Employers must match Social Security and Medicare contributions to the federal government for an extra 7.65%.

Social Security and Medicare are not withheld at the state level, and the amount withheld varies by state.

Special Considerations

Former President Trump signed a $2 trillion coronavirus emergency relief bill into law on March 27, 2020. Employers (rather than workers) may delay their part of Social Security taxes until December 31, 2020, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act; 50% of the deferred amount is payable by December 31, 2021, and the other half by December 31, 2022.

The legislation also applies to self-employed individuals. Certain firms will also be able to claim a payroll tax credit for workers who are still being paid but are unable to work due to the crisis.

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