It can actually get even funnier. I worked for a large corporation years ago for about 10 years and they had pension plans so I ended up vested in it and get about $200 a month out of it. They withhold both state and federal taxes from it. I usually get them back when filing. Then every year I get a letter from the state tax authority telling me that I should not be having tax withheld from that plan as it is untaxable income. I call the pension plan and they tell me that the State of California requires them to withhold 3% by law of the amount paid.