do I still have to pay a penalty for early 401k withdrawal if Federal Tax was already taken out

[MindyB]

Yes.  The federal tax you paid will then be deducted from the liability computed on your tax return.

[SteamTrain]

i.e. the tax return you prepare will calculate the final tax due for all of the distribution....AND give you credit for the taxes withheld when it was distributed.  Sometimes the tax withheld does not cover all of it, and you are charged the difference.  Your total year's tax return that you file, takes your total situation into account.

[VolvoGirl]

You didn't actually pay the tax or the 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½). You had taxes withheld like from your paycheck. You still have to enter the whole gross amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The Gross amount shows up on 1040 line 4a or 5a and the taxable amount on 4b/5b. The withholding will show up on 1040 line 25b.

It has to break out and show the 10% penalty separately on your return (schedule 2 line 8 which goes to 1040 line 23). Then you get credit for all the withholding taken out on 1040 line 25b.