It sounds like the distribution was $7000, so that the penalty for the early withdrawal is 10% and the withholding is a "standard" 20%. That is, unless you instruct the IRA or 401(k) administrator to do otherwise, it is common for them to withhold 20% for your federal taxes.
But understand that the IRA or 401(k) administrator has no idea what your actual federal tax will be, because your tax is a function of your income, your deductions, and other personal factors that these administrators do not know. So the $1,400 is put into your tax account, to be used to pay whatever your final tax bill may be. This 20% does not specifically cover your early distribution penalty; instead all the taxes and penalties are calculated separately and applied against the total of your withholdings.
All is correct.
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