Can someone explain this to me

When I make a withdrawal from a 401K they add the federal tax for the tax % I fall into.

The thing I am having a problem understanding is,

If they are making me  pay federal taxes on my withdrawal and adding the taxes to my total withdrawal which becomes taxable income. Then at tax time I am taxed at my total income with includes the taxes they withheld and added to my total withdrawal . How is that not double taxing me for the amount they added to my 401K withdrawal for taxes? seems I am sending the Federal Gov. the taxed for the income % rate of the total withdrawal and then IRS looks at total and I am taxed again???

 I realize they are withholding and sending that to the IRS but it is still being added to my total imncome which is used to determine my taxable income for the year...

Yes you are taxed on the gross distribution including the amount you add to cover that year's taxes which are then withheld, not unlike someone increasing their withholding on their W-2 wages.

One reason you might do this is to avoid penalties for being under withheld when you file your 1040. Another option might be to elect the minimum required withholding from your qualified plan distribution and pay estimated quarterly tax payments or increase withholding on other sources of income (assuming you have the funds available to do that). Which option is right for you depends on a lot of individual factors we can't address here. You might wish to discuss your specific tax situation with your CPA.

Belgarath has a pretty good overview above that lays out some of the basics.

4 hours ago, Eaglepi said:

When I make a withdrawal from a 401K they add the federal tax for the tax % I fall into

This sentence is incorrect.

The plan doesn't know what tax rate you fall into, or any of the participants fall into. As others mention, the withheld amount toward federal taxes  is defaulted as 20%. If your personal taxes end working out more than that, you will owe. If your personal tax situation ends up being less than that, you will be given a refund after you file your personal return. 

Yes but if someone wants a "Net $10K" withdrawal they will need to gross it up for the 20% taxes withheld and take $12.5K gross, ignoring any potential state withholding.

This assumes the distribution is eligible for rollover with the required 20% withholding and they're not electing more than 20% because they might be in a higher tax bracket.

One thing that people seem to be forgetting is that if this is a hardship withdrawal, then the 20% mandatory federal tax withholding does not apply since a hardship withdrawal is not an eligible rollover distribution. In that case, optional 10% withholding would apply.

Also, a distribution’s gross-up need not be restricted to amounts withheld toward taxes but might, even for a hardship distribution, include someone’s reckoning of “amounts necessary [for the distributee] to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution[.]” 26 C.F.R. § 1.401(k)-1(d)(3)(iii)(A).

I’ve seen a plan’s administrator approve a hardship distribution for 200% of the need amount. For some New York City residents (with marginal income tax rates summing more than 50%), that’s still not enough to meet the taxes that result from a too-early distribution.

A plan’s administrator and its service provider might assume they don’t know everything about the distributee’s and one’s spouse’s circumstances, and so approve a gross-up request within a plausible range.

Eaglepi, say you work for a company. For a week's work, they owe you $1,000 and they run that through payroll. Withhold federal income and FICA, so you actually receive in cash, say, $700 and change. But the full $1,000 goes on your W-2.

It's the same thing with 401(k). And just as with wages, you credit whatever they withheld against the calculated tax on your 1040 when you file.