Working out if you’re paying the right taxes for your employees can lead to a lot of stress and anxiety. It’s the sort of thing you’ve got to get right or you risk the wrath of everyone from your team members to the IRS! On top of this, local law can vary massively from state to state when it comes to how taxation works.
This is even more complex if you’re a small business owner juggling tasks like payroll and employee scheduling without a dedicated accounting team. If only there was a simpler way!
In this article, we’ll provide you with everything you need to know about state payroll taxes 2024/25. We’ll help you navigate the complexities of paying payroll taxes and we’ll also help you understand how a tool Homebase can make everything far easier to juggle.
What is state payroll tax?
State payroll taxes include income tax, unemployment tax, and local taxes in some states and cities. Income taxes are paid by employees, and unemployment taxes are paid by business owners.
Some states don’t have an income tax, but all states have an unemployment tax and a few states and cities also have local payroll taxes. For more info, we’ve covered everything you need to know about state payroll taxes previously.
But here’s a short summary of the elements that make up state payroll taxes.
State income tax
State income tax rates are not uniform across the U.S. Nine states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—do not tax regular income. Employees in these states won’t have state income tax deducted from their paychecks.
Another nine states—Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah—impose a flat tax rate. The application of this rate varies by state, so consult your state’s tax rules for specifics.
The remaining states, along with Washington D.C., have progressive tax rates based on income levels. Tax brackets range from three to twelve. Always verify current rates and brackets with your state.
State unemployment tax
All states collect unemployment tax to fund benefits for qualifying jobless individuals under the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA). Business rates are determined by various factors including business tenure and former employee claims. These rates are subject to annual changes.
Local taxes
Local payroll taxes may apply depending on your state or city. Examples include Oregon’s statewide transit tax and local taxes like California’s Employment Training Tax (ETT) and State Disability Insurance (SDI), with the former paid by employers and the latter by employees. To avoid unexpected liabilities, confirm applicable local taxes with relevant government agencies before processing payroll.
Payroll taxes by state: A closer look
Here’s what you need to know state-by-state when it comes to payroll tax differences. Note these are up to date as of Jan. 31, 2024. Please check official state and local sources for the most up-to-date information.
States with no income tax
In states without an income tax, employers’ payroll tasks are streamlined to federal obligations and any applicable state-specific taxes such as unemployment insurance. Here’s what employers in these states need to focus on:
- Federal payroll taxes: All employers must comply with federal tax obligations, including withholding Social Security and Medicare taxes under FICA.
- State unemployment insurance tax: Employers need to contribute to their state’s unemployment insurance fund, with rates and policies varying by state.
This applies in:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas (known as the Texas Unemployment Tax)
- Washington (includes workers’ compensation insurance)
- Wyoming
States with flat income tax rates
Employers in states with flat income tax rates should withhold state income tax at the uniform rate provided by the state. Additionally, they must handle unemployment insurance and federal payroll taxes:
- Colorado
- Illinois
- Indiana (employers also need to manage county tax rates)
- Massachusetts
- Michigan
- North Carolina
- Pennsylvania (local tax considerations may also apply)
- Utah
- Kentucky
States with progressive income tax
For states with progressive income tax systems, employers must regularly update withholding tables to align with the varying tax brackets and rates. Employers are also responsible for state unemployment tax and federal payroll taxes. The list below includes states with progressive income tax systems, but it’s essential for employers to check for any state-specific regulations that may affect payroll:
- Alabama
- Arizona
- Arkansas
- California
- Connecticut
- Delaware
- Georgia
- Hawaii
- Idaho
- Iowa
- Kansas
- Louisiana
- Maine
- Maryland
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- New Jersey
- New Mexico
- New York
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Rhode Island
- South Carolina
- Vermont
- Virginia
- Washington D.C.
- West Virginia
- Wisconsin
Other states
Some states have unique tax rules that employers must be aware of:
- New Hampshire: No state income tax is withheld, but taxes on dividend and interest income are applicable.
- Tennessee: Similar to New Hampshire, with the addition of the state tax on dividend and interest income. Employers should also handle federal payroll and unemployment taxes.
Reporting and Filing Requirements
As a business owner, you’ll need to adhere to various reporting and filing requirements to ensure compliance with payroll taxes:
- Federal Compliance: Annually file W-2 forms reporting wages and taxes withheld for each employee. Use Form W-3 to summarize these W-2s when submitting to the Social Security Administration. Quarterly, file Form 941 or annually Form 944 to report wages paid, and taxes collected for income, Social Security, and Medicare.
- State-Specific Reports: Depending on the state, you may be required to file additional quarterly reports. For instance, California businesses must submit DE 9 and DE 9C forms for unemployment insurance and state disability insurance contributions.
- Unemployment Insurance: Most states require quarterly filings to report wages and pay state unemployment insurance tax. The form names and specific requirements vary by state.
- New Hire Reporting: States also mandate reporting of new hires to track child support obligations.
- Local Taxes: Some localities require separate filings for taxes such as local income, school district, or other municipal taxes.
- Deadlines and Forms: Each state and locality may have different deadlines and forms. It is essential to consult your state’s Department of Revenue and Employment website or a tax professional for the correct forms and filing schedules.
State payroll taxes made simpler
As we’ve covered, making sure your business is compliant with federal, state, and local law can be complex when it comes to payroll tax. Homebase offers features that can simplify payroll tax compliance:
- Automated Payroll Processing: Homebase converts timesheets into hours and wages, calculates taxes, and ensures correct payments to employees and tax authorities.
- Tax Filing: Homebase automatically processes tax filings, issues 1099s and W-2s, and submits new hire reporting, helping you meet federal and state requirements.
- Error Reduction: By syncing time tracking with payroll, Homebase helps avoid mistakes in hours, breaks, overtime, and PTO calculations.
- Streamlined Data Management: Employees can self-onboard and e-sign their payroll forms, centralizing tax and bank information.
- Compliance Support: Homebase assists in setting up state-specific breaks and overtime rules and stores time card records to comply with FLSA rules.
Understanding payroll taxes by state is essential for your business’s compliance and financial health. It’s not just about understanding the tax rates but also about knowing how to properly withhold, report, and remit these taxes. A tool like Homebase can simplify these complex processes, allowing you to focus on growing your business.
Frequently asked questions about payroll taxes by state
What if my business operates in multiple states?
You will need to withhold taxes for each state in which you operate. Each state has its own set of forms, rates, and rules for employers to follow.
What’s the difference between income tax and payroll tax?
Income tax is a direct tax levied on the income of individuals or businesses. It’s progressive, meaning the rate increases as the taxable amount increases. Taxpayers file income tax returns annually to report their income, claim deductions, and determine their tax liabilities.
Payroll tax, on the other hand, refers to taxes an employer withholds from employees’ paychecks and pays on behalf of them. It includes Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). These taxes are flat rates and are used to fund specific social insurance programs. Unlike income tax, payroll tax is shared by the employee and the employer, each paying a portion.
How do I determine the correct withholding amount?
You can use IRS tax tables, state guidelines, and tools like Homebase to help with the correct withholding amounts. Regularly update your payroll systems to stay compliant with any changes in tax rates.
Remember: This is not legal advice. If you have questions about your particular situation, please consult a lawyer, CPA, or other appropriate professional advisor or agency.
