Federal and state withholdings for payroll taxes

What are federal withholdings and state withholdings?

The U.S. has a pay-as-you-go tax system. This is generally accomplished by withholding money from your paycheck for both federal and state tax obligations. State withholding is based on state level taxable income, while federal withholding is based on federal taxable income. State withholding rules tend to vary by state (read more on that below), but the federal withholding rules are consistent everywhere throughout the U.S.

What is withholding tax?

Put simply, if you're an employee, your employer withholds federal income taxes and your share of Social Security and Medicare taxes from your paycheck and sends your withholdings to the IRS and your state tax authority in your name.

Federal income tax withholding

Your employer will use information you provided on your IRS Form W-4 to determine how much to withhold in income taxes. The amount of your taxable income and how frequently you are paid also play a part in how much federal income tax withholding (FITW) and state income tax withholding (SITW) to withhold from each paycheck.

How to calculate federal income tax withholdings

If you earn more than usual during a pay period—such as receiving a bonus or working overtime—the will increase. If you earn less—by working fewer hours or increasing contributions to your retirement savings—the FITW / SITW will decrease. It’s advised to have at least enough FITW / SITW during the year to cover your expected income tax bills.

What does Fed Tax, FT or FWT mean on your paycheck?

Federal income tax might be abbreviated as Fed Tax, FT, FWT or other ways on your paycheck. Your federal withholding is the amount that you’ve put aside for your income taxes. Your employer sends the appropriate amounts to the IRS.

This means you’ll get a credit for this amount to apply to any taxes you owe, after determining deductions and credits. According to the IRS, your federal income tax withholding from your pay depends on:

• The filing status shown on your W-4 form,
• The child tax credits associated with the number of dependents specified,
• Other income and adjustments on the Form W-4 you filed with your employer.

State withholding tax

As mentioned above, state income tax withholding can vary greatly, depending on where you live and work. If your state has an income tax, you will probably have state income taxes withheld from your paycheck. Your employer will use information provided on the state version of Form W-4 and your income to figure out how much to withhold.

If you owe taxes to more than one state (for instance, if you work in a different state from your resident state) you may want to ask that your employer withhold taxes for the state you live in and the state you work in. Or you can make estimated payments to the state you live in to make up the difference.

You can reach out to your Jackson Hewitt Tax Pro about any questions that may come up about complicated multi-state situations to avoid errors or a larger-than-expected tax bill when you file your federal and state returns.

While you will likely have state tax withholdings on your paycheck, it depends on where you live. In fact, based on your location, you might:

• Live and work in a no-income-tax state.
• Have state withholding for more than one state—the state you live in and the state(s) you work in, or the states your work in, but not your home state.
• Have local withholding for your city or town.

How much is federal and state tax?

In 2023, the U.S. federal tax rates range from 10% to 37%. The U.S. has a progressive tax system, where portions of a person's taxable income can fall into different brackets to be taxed at different rates. These tax brackets are adjusted each year to account for inflation. This can help prevent a taxpayer from paying higher taxes as the cost of living increases.

Your state and local taxes vary by where you work and live. Always work with a Tax Pro to figure out the right tax rate for you.

When should you think about changing your withholding?

The IRS recommends thinking about reviewing and possibly changing your withholding:

• Early in the year.
• When the tax law changes.
• When you have major life changes, like:
  • Lifestyle: Marriage, divorce, birth or adoption of a child, home purchase, retirement, or filing chapter 11 bankruptcy.
  • Wage income: You or your spouse start or stop working or start or stop a second job.
  • Taxable income not subject to withholding: You receive interest income, dividends, capital gains, self-employment income, or IRA (including certain Roth IRA) distributions.
  • Adjustments to income: You expect to take IRA deductions, student loan interest deductions, or alimony expense.
  • Itemized deductions or tax credits: You expect to have medical expenses, taxes, interest expenses, gifts to charity, dependent care expenses, education credit, child tax credit, or earned income credit.

There are other situations not included here. If you think you may not be withholding enough federal tax, it may be time to adjust your withholding using Form W-4.

Questions? We are here to help you navigate the complexities of federal and state tax withholdings. You can work with Jackson Hewitt Tax Pro to decide what the right next steps may be for your tax situation.

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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