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

Federal Withholding Tax vs. State Withholding Tax: An Overview

When you receive your paycheck, a portion is withheld to cover your tax obligations. This withholding is an estimate of the taxes you'll owe at the end of the year and is based on your income, marital status, and other factors.

The total amount of tax withheld is divided by the number of pay periods you have a year. In the case of hourly employees, it's divided by how many hours you work in a pay period. For example, if you owe $10,000 and are paid weekly, $192.30 would be withheld from each paycheck, totaling $10,000 by year's end (calculated as $10,000 divided by 52 weeks).

The key distinction between federal and state withholding is that federal withholding applies uniformly across the U.S., while state withholding varies by state.

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 withholding, taxpayers had to pay their income taxes in full by a set date (historically in March). This system often created financial strain. By automatically deducting taxes throughout the year, the withholding system made it easier for taxpayers to manage their tax burden without facing large, unexpected payments at tax time.

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.

Employers determine the withholding amount using information you provide on Form W-4, including your marital status and number of dependents. The goal of withholding is to get as close as possible to the total amount of taxes you'll owe, so you neither owe a large amount at year’s end nor receive too much in the form of a tax refund.

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.

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 Between Federal and State Withholding

The federal government imposes Social Security taxes at 6.2%, with a wage base limit of $168,600 in 2024 (rising to $176,100 in 2025). The Medicare tax is 1.45%, with an additional 0.9% tax on earnings above $200,000. These taxes are withheld at the federal level but not by state. Employers must match Social Security and Medicare payments for an additional 7.65% paid to the federal government.

Each state has its own income tax rules. The amount withheld depends on your state’s tax brackets, which can vary significantly. Social Security and Medicare taxes are not withheld at the state level.

The Bottom Line

Both federal and state withholding taxes are amounts deducted from your paycheck to cover your income tax liability. The goal of withholding is to ensure you don’t owe a large sum at the end of the year. While federal taxes are consistent across the U.S., state taxes vary widely depending on where you live. Some states have no income tax at all, while others impose high rates.

Understanding the differences between federal and state withholding can help you better manage your tax situation, ensuring you have enough withheld to avoid a tax bill without overpaying throughout the year.