As an employee, it’s essential to understand the differences between federal and state tax withholding on your paycheck stub. Withholding taxes are the money your employer deducts from your paychecks to remit to the government as your tax obligation. Federal and state taxes are two of the most common types of withholding taxes that you will see on your paycheck stub. This blog post will delve into the differences between federal and state tax withholding, including how they work, their rates, and how to calculate them.
What is Federal Tax Withholding?
Federal tax withholding is the amount your employer withholds from your paycheck to remit to the federal government as your income tax obligation. The amount of federal tax withheld depends on your income, filing status, and the number of allowances you claimed on your W-4 form.
Your W-4 form is a form you fill out when you start a new job to inform your employer how much federal tax to withhold from your paycheck. The form allows you to specify your filing status, the number of dependents you have, and other personal information the employer will use to determine your federal tax withholding.
Federal tax rates are progressive, meaning that the more you earn, the higher the percentage of your income you will pay in taxes. For instance, in 2021, you won’t owe any federal income tax if you earn less than $9,950 as a single filer or $19,900 as a married filing jointly. If you earn between $9,951 and $40,525 as a single filer or between $19,901 and $81,050 as a married filing jointly, you’ll owe 12% of your income in federal income tax.
How is Federal Tax Withholding Calculated?
Your employer will use the information you provide on your W-4 form to calculate your federal tax withholding. They will use the IRS tax tables based on your filing status, the number of dependents you have, and your taxable income.
To calculate your federal tax withholding, your employer will multiply your taxable income by your tax rate, which they will get from the IRS tax tables. For instance, if your taxable income is $50,000, and your tax rate is 22%, your federal tax withholding will be $11,000.
What is State Tax Withholding?
State tax withholding is the amount your employer withholds from your paycheck to remit to the state government as your income tax obligation. State tax rates and regulations vary from state to state, so the amount of state tax withheld from your paycheck will depend on the state where you work.
Like federal tax withholding, the state tax withheld from your paycheck will depend on your income, filing status, and the number of allowances you claimed on your state tax withholding form. The state tax withholding form is usually separate from the federal W-4 form and is specific to the state where you work.
State tax rates are also progressive, meaning that the more you earn, the higher the percentage of your income you will pay in state taxes. For instance, in California, if you earn less than $8,932 as a single filer or $17,864 as a married filing jointly, you won’t owe any state income tax. If you earn between $8,933 and $44,263 as a single filer or between $17,865 and $88,526 as a married filing jointly, you’ll owe 2% of your income in state income tax.
How is State Tax Withholding Calculated?
Like federal tax withholding, your employer will use the information you provide on your state tax withholding form to calculate your state tax withholding. They will use the state tax tables based on your filing status.
To calculate your state tax withholding, your employer will multiply your taxable income by your state tax rate, which they will get from the state tax tables. For instance, if your taxable income is $50,000, and your state tax rate is 5%, your state tax withholding will be $2,500.
Differences Between Federal and State Tax Withholding
While federal and state tax withholding may seem similar, the two have several key differences. Here are some of the most significant differences:
1. Tax Rates
Federal tax rates are typically higher than state tax rates. For instance, in 2021, the highest federal tax rate is 37%, while the highest state tax rate is 13.3% (in California).
2. Taxable Income
Federal taxable income includes all sources of income, including wages, salaries, tips, interest, and dividends. State taxable income may not include all sources of income, and each state has its rules about what income is taxable.
3. Withholding Limits
Federal tax withholding limits are set by the IRS and apply to all employees. State tax withholding limits vary by state and may depend on your filing status, number of dependents, and income.
4. Forms
The federal tax withholding form is the W-4 form, a standardized form all employers use. State tax withholding forms vary by state and may not be standardized.
Conclusion
Understanding the differences between federal and state tax withholding on your paycheck stub is crucial to managing your finances effectively. Federal and state taxes are two of the most common types of withholding taxes that you will see on your paycheck stub. While federal taxes are applicable in every state, state taxes and rates vary from state to state. Therefore, it is essential to check with your state’s taxation agency or a financial advisor to understand your state’s tax laws and regulations.
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