Overview: State Payroll Taxes

Last Updated: Apr 20, 2016 11:51AM EDT

State Payroll Taxes: As an employer, you have state payroll tax responsibilities that include paying state unemployment taxes and, depending upon your state, withholding state income taxes from your employees’ wages.

State Unemployment Insurance

What is State Unemployment Insurance?

All states are required by federal law to have a state unemployment compensation law. State laws work in conjunction with the federal law. Federal unemployment taxes provide funds needed to administer both federal and state programs, while state unemployment taxes fund the benefits that unemployed workers receive. This payroll tax is known as The State Unemployment Tax Authority, also called SUTA, whereas the federal payroll tax is known as FUTA, the Federal Unemployment Insurance Program.  

Unemployment insurance premiums are the responsibility of the employer to pay, with the exception of three states which do require an employee contribution: Alaska, New Jersey, and Pennsylvania. The federal unemployment fund also helps states that don’t have sufficient funds to pay unemployed workers. States can receive loans to cover the shortfall in their funds.

States require employers to submit quarterly reports of contributions and gross and taxable wages. Each state has their own rules; employers must verify that they are compliant in each state.

How is SUTA calculated?

Employers can calculate the SUTA tax by finding the wage base in their state. FUTA requires that each state’s taxable wage base must at least equal the FUTA wage base of $7,000 per employee (the FUTA rate is 6% of the first $7,000 of each employee’s taxable wages each year). Many states simply use the FUTA wage base, though some states apply alternative formulas to determine the taxable wage base, like using a percentage of the state’s average annual wage.

One important consideration to note is that the SUTA tax rate is impacted by how many unemployment claims are filed by former employees. An employer’s rate of withholding can be increased if a substantial number of former employees are collecting unemployment benefits. This is called experience rating. Each state has its own method of calculating the experience ratings, as well as how to keep their unemployment fund balances in the black.

The states’ labor or workforce departments have extensive information available on the funds, keeping the funds balanced, and tips on how to retain employees, in order to keep employer costs down.

State Income Tax

What is State Income Tax?

Forty one states impose additional state income taxes on employee earnings (exclusions include Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, *New Hampshire, and *Tennessee). Each state has different laws for administering their income tax. Some states with income taxes allow the Federal W-4 to default so that it can be used for the state. In other words, the Federal and state allowances can be assumed to be the same.  Most states use a similar structure as the federal government to calculate the tax, but a small minority of states impose the income tax at a flat rate on all taxpayers, regardless of the income level.
For instance, in 2015, Indiana had a 3.3 percent flat income tax. To put that in perspective, someone earning a $10,000 yearly income would owe $330  in state income tax. Someone earning a $100,000 yearly income would owe $3,300 in state income tax. In addition to state income taxes, certain states also require employee withholding for state unemployment and/or disability taxes.

Reciprocal Agreements

In most cases, states require withholding of their income tax on income earned in that state.  Some states may require withholding on residents, regardless of where the wages are earned.

For contiguous states, it is sometimes expedient to enter into a reciprocal agreement for state withholding. Under such an agreement, employers may withhold income tax for the employee’s state of residence, instead of the

work state.  An example is the DC/MD/VA axis.  Under this, residents of Washington, Maryland and Virginia have their own state tax withheld, as opposed to the normal work state withholding. Some states, New York, for example, don’t enter into reciprocal agreements. Withholding is required from anyone who works in New York.

Local Taxes

Certain municipalities levy income taxes on either a. residents; b. non-residents who work within the municipality, or c. both.  Each city or local jurisdiction can create and manage its tax policy.  Some examples:

New York City – residents of the City of New York are liable for the NYC Income Tax, regardless of where they work.

Yonkers – the City of Yonkers levies an income tax on residents and on non-residents that work within the City.

Pennsylvania Locals – Each city, school district, borough and county in Pennsylvania has the ability to levy a tax on residents.  These taxes are due regardless of where the resident might work.  In some cases, both a resident and a work-location-based tax are due.

Indiana – county-based taxes are due from both residents and workers within the county.  Rate listings are provided for businesses to ensure that the appropriate tax is withheld and remitted.

* New Hampshire: New Hampshire also has no income but charges a 5% tax on interest and dividends.

* Tennessee: Tennessee has no income tax on wages, but does charge a 6% tax on interest and dividends.

In this article, we have covered the two state payroll tax obligations employees and employers are required to pay: SUTA Taxes and State Income Tax. While this overview covers the requirements of these taxes as fully as possible, and is intended to help you understand basic state payroll tax requirements, we urge you to contact a payroll professional if you have additional questions.
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