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Difference Between Federal Withholding Tax & State Withholding Tax

Federal withholding tax refers to the amount taken by the employer out of the employee’s paycheck for taxes and then remitted to the Federal Government on the employee’s behalf. On the other hand, a state withholding tax refers to the amount collected by the employer through a completed form from a new hire. The total of all such amounts collected is used by the states to fund various state projects and programs like health care, public assistance, education, etc.

 

Talking about differences between federal withholding tax and state withholding tax, they include:

 

  • Federal withholding is based on federal taxable dollars while state withholding is based on state-level taxable income.
  • All U.S. citizens are subject to federal withholding unless they have no tax liability at all in the previous year and they don’t expect a tax liability at all in the current year. On the other hand, U.S. citizens living in a state are subject to withholding taxes of the state they are living in and not those of other states.
  • States can only withhold amounts for their own income taxes and not all states can impose them.
  • Social Security and Medicare Taxes are withheld only at the federal level, and not at the state level.
  • Federal withholding rules are consistent everywhere throughout the United States while state withholding rules tend to vary among the states.

 

Federal withholding tax, introduced in the 1940s to fund military operations during World War II, expedited the tax collection process and made it very easy for the Governments to raise additional taxes without most tax-payers becoming aware of it. For federal withholding tax, employees provide their personal details, including marital status and number of dependents to employers on Form W-4. In return, employers use these guidelines to determine to withhold based on the number of wages earned in that pay period.

 

On the other hand, both state and local Governments can impose state withholding tax on wage income based on their own tax rates. The state withholding process is similar to that of federal withholding for income tax. However, states have their own versions of Form W-4, currently seven states – Alaska, Florida, Nevada, South Dakota, Texas, Washington, & Wyoming. (New Hampshire and Tennessee also do not have withholding because they pay tax only interest and dividend income, not wages) – do not have an income tax at all and as such, they do not have withholding tax.

 

Guidance On Federal / State Withholding Tax

 

If you want to know all about federal withholding tax and state withholding tax and the differences between them, then look up the Compliance Prime webinar.

 

Compliance Prime, a leading training service provider with its all-around knowledge and understanding of EEOC, REAC & HUD, is ideally placed to guide you on federal as well as state withholding tax and all aspects related to their differences.

 

It is also known for providing high-quality training to business professionals with innovative strategic training solutions that have gained the trust of professionals looking to enhance their skills and drive performance, over the years. The training programs are the most practical, relevant training programs explained by experts with a wealth of knowledge covering the best practices, new ideas, and practical tips that you can put into practice right away.

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