When it comes to withholding taxes, there are two types: federal and state. Depending on your residency and where you work, you may have to pay both types of taxes. However, the amount withheld from your paycheck will be different for each type of tax. This blog post will compare and contrast federal and state withholding taxes, so you can better understand which one applies to you.
What is withholding tax and why do we have it?
Withholding tax is a type of income tax that is paid to the government by employers and other payers. This tax is calculated on each payment made to an employee, including wages, salaries, bonuses, commissions, non-cash payments, and more. The amount withheld from each paycheck is determined based on Federal Withholding Tax rates as well as State Withholding Tax rates, which may vary from one state to another. Federal Withholding Tax is mandated by the IRS (Internal Revenue Service), while State Withholding Tax rates are set by each individual state.
The purpose of withholding tax is to ensure that employees pay their estimated taxes on time and in full. It also helps minimize the risk of individuals underpaying or not paying taxes altogether. Employers are responsible for collecting and remitting Federal Withholding Tax payments to the IRS. Similarly, employers must collect and remit State Withholding Tax to the appropriate state authority.
When an employee files their tax return at the end of the year, they will use their Federal and State Withholding Tax payments as credit toward their tax liability (the amount of taxes they owe). Any Federal or State Withholding Tax payments in excess of the employee’s tax liability will be refunded by the Federal and/or state government.
Federal withholding tax vs. state withholding tax
Federal withholding taxes are collected by the Federal Internal Revenue Service (IRS) and are paid to the U.S. Treasury. Federal taxes include income tax, Social Security tax, Medicare tax, and Federal Unemployment Tax Act (FUTA) taxes. Federal withholding taxes are generally taken from an employee’s paycheck throughout the year to cover their income tax liability, but employers are also required to pay the Federal Unemployment Tax Act (FUTA) taxes.
State withholding taxes, on the other hand, are collected by each state’s department of taxation and revenue. These taxes vary from state to state and may include individual income tax, corporate income tax, sales tax, or any other taxes imposed by state or local governments. State withholding taxes are generally taken from an employee’s paycheck throughout the year to cover their income tax liability as well.
The amount of Federal and State withholding taxes that employers must withhold is based on the IRS Publication 15 (Circular E), which provides information about Federal and State withholding requirements. Employers must also ensure that Federal and State withholding taxes are sent to the respective agencies, usually within a certain period of time. Failure to comply may result in penalties or fines.
How to calculate withholding tax
When you calculate withholding taxes, you must consider Federal Withholding Tax and State Withholding Tax. Federal tax withholding is based on the amount of your income that comes from regular wages or salary. Your employer figures it out using information from your W-4 form. The amount withheld for Federal taxes can vary depending on how much money you make and how many allowances you claim. Federal tax tables are updated annually, and you can use these to help calculate your Federal Withholding Tax.
State withholding taxes vary from state to state, but typically the employer withholds a flat rate of income tax using information from your Form W-4. The amount withheld depends on how much money you make, the allowances you claim, and your state’s particular tax laws. Some states also have an additional withholding, such as an income surtax or county withholdings. You should check with your local government to determine what is required in terms of Federal and State Withholding Tax in your state.
When to file a withholdings tax return
When a Federal or State withholding tax return is necessary depends on the amount of taxes withheld and other factors. Generally, Federal withholding taxes must be reported when the total amount withheld for an employee reaches $2,500 or more during a calendar year. Similarly, state withholding tax returns must be filed when the total amount of taxes withheld from all employees reach $500 or more.
It is also important to note the distinction between Federal and State withholding taxes. Federal withholding tax applies to all employees regardless of the state in which they work, while state withholding tax varies from state to state and may require additional filing requirements besides what Federal Taxes need. This can be especially true for employees who work in multiple states, as they may be required to file both Federal and State withholdings taxes.
How to claim a refund on withheld taxes
When you file your taxes, you may be eligible for a tax refund if Federal and/or State withholding taxes were taken out of your paychecks. Federal Withholding Tax is the amount of tax withheld from each paycheck to cover Federal income tax liability. On the other hand, State Withholding Tax is the amount of tax withheld from each paycheck to cover state income tax liability.
To claim a Federal and/or State withholding tax refund, you must complete an appropriate tax return form for your Federal or State government. The forms vary from state to state but typically include documents such as the W-2 wage and earnings statement, 1099s for any other income sources (such as interest earned), and other financial documents such as bank statements.
Once you have completed the required forms, submit them to your Federal or State tax agency. They will then process the claim and determine whether or not you are eligible for a refund based on your Federal or State withholding taxes. If approved, you will receive a check in the mail for the amount of the refund.
FAQs
What is Federal Withholding Tax?
Federal withholding tax is an amount of money withheld from an employee’s paycheck by their employer and sent to the Federal government. This deduction is mandatory and helps fund Social Security, Medicare, Federal income taxes, and other programs that are managed at the Federal level. The Federal withholding tax rate is determined by the employee’s W-4 form and Federal income tax laws.
What is State Withholding Tax?
State withholding taxes are generally imposed on wages, salaries, commissions, and other forms of compensation paid to individual employees. This deduction is mandatory and helps fund state programs that are managed by the Federal government. The state withholding tax rate is determined by the employee’s W-4 form and Federal income tax laws. The amount of money withheld from an employee's paycheck for state taxes may vary from one state to another. Additionally, some states may have additional local or city-level income taxes that must be paid in addition to Federal and state taxes.
What is the difference between Federal Withholding Tax and State Withholding Tax?
Federal withholding taxes are calculated based on Federal income tax laws and used to fund Federal programs, while state withholding taxes are calculated based on Federal income tax laws and used to fund state programs. Additionally, the amount of money withheld from an employee’s paycheck for Federal and State taxes may vary from one state to another.
Conclusion
I hope this article has helped you understand the difference between Federal Withholding Tax and State Withholding Tax. Federal withholding taxes are mandatory deductions from an employee’s paycheck that help fund Federal programs, while state withholding taxes are mandatory deductions from an employee’s paycheck that help fund state programs.
Also, the amount of money that is taken out of an employee's paycheck for Federal and State taxes can be different depending on what state they live in. Understanding Federal Withholding Tax and State Withholding Tax is important for ensuring that you pay the correct amount of taxes and avoid costly mistakes. If you have any questions about Federal or State withholding tax, please contact a qualified tax accountant for professional advice.
