Managing state payroll taxes is a vital part of operating a business. It entails withholding and reporting different types of taxes applied to employees’ wages and salaries. Companies must perform these calculations and filings regularly to stay compliant with state laws.
State payroll taxes vary by state and depend on factors, such as the business structure and the industry in which your business operates. Each state has its own general rules for calculating payroll taxes, but federal regulations apply to most states.
As a business owner, you must understand the state and federal payroll tax laws that apply to your business. This guide provides a detailed overview of state payroll taxes, how to process payroll taxes in your business, and the legal repercussions for noncompliance.
What are State Payroll Taxes?
State payroll taxes are state-administered, federally mandated tax payments that employers withhold from their employee’s paychecks. These taxes are based on a percentage of the employee’s wages, salaries, and tips. As a business owner, it’s your responsibility to process, file, and remit payroll taxes regularly.
Most states follow federal guidelines for withholding and depositing payroll taxes. However, some states have more specific or unique state-specific tax withholdings and deposits. For example, some states such as Alaska, Florida, Nevada, and Dakota do not impose state withholding taxes.
Once you hire your first employee, the IRS and relevant state revenue agencies consider you an employer. You will receive an employer identification number (EIN), which you must report on your tax return and other official documents.
Difference Between Payroll Taxes and Income Taxes
Payroll taxes are different from income taxes. Income tax, commonly known as the personal income tax, applies to individual residents based on their income level. Businesses pay corporate income taxes from taxes after deducting all business expenses.
Payroll taxes are withheld from employees’ wages for various state and federal programs, such as Social Security or state unemployment compensation funds. The IRS is responsible for collecting payroll taxes from employers and depositing the money in government accounts.
Federal Payroll Taxes vs State Payroll Taxes
Federal payroll taxes are mandatory. State payroll taxes depend on the states’ tax laws.
The most common federal payroll taxes include:
Federal Insurance Contribution Act (FICA)
Federal Insurance Contributions Act (FICA) Tax consists of Social Security and Medicare surtaxes for employees and employers. It funds financial support for retirees, people receiving Supplemental Security Income (SSI), workers with disabilities, dependents, survivors of covered workers, and workers’ compensation. The total FICA tax paid by employees and employers is 7.6% of the gross wage, salary, or tips.
Federal Unemployment Tax Act
Federal Unemployment Tax Act (FUTA) Taxes provide funding to state unemployment agencies to support economic stability during times of recession or high unemployment. It operates as an employer-funded program that pays benefits to eligible unemployed workers who lost their jobs through no fault of their own.
Business owners must withhold these taxes from employees’ wages and file the appropriate IRS forms. Taxes are withheld at a fixed rate, and it’s based on your employee’s income level and amount of personal withholdings (such as exemptions and deductions).
Types of Payroll Taxes Paid to the State
There are two types of state payroll taxes; withholding tax and unemployment insurance tax.
State Withholding Tax
Withholding tax is the amount that you withhold from your employee’s wages for state income tax purposes. Each state has its own withholding tax rate that applies to a specific type of income. For example, some states have individual income tax rates for wages and salaries, while others have a single income tax rate for interest and dividends.
Local governments can impose additional withholding percentages on top of federal and state withholdings. An example of this is when an employee works in a state with no individual income tax, but the local taxes require additional withholding.
Employers use the state Form W-4 (employee’s withholding certificate) to determine the proper amount of state income tax to withhold from their employee’s paycheck. Each W-4 form is specific to a state and often requires the employee’s social security number, marital status, occupation, federal wages, and estimated tax payments.
State Unemployment Insurance Tax (SUI Tax)
State unemployment insurance tax is a tax that employers pay to fund unemployment benefits due to various reasons. Some of these reasons are layoffs, employee turnover, or financial conditions that result in the need to reduce staff. While the SUI tax isn’t generally withheld from employees’ paychecks, some states mandate that employers contribute to the fund.
The State Unemployment Tax Act (SUTA) requires that each business pay a percentage of its taxable payroll to fund unemployment benefits. In most states, the SUTA tax only applies to employers. However, some states, such as Alaska, Pennsylvania, and New Jersey, require employees and employers to pay into the unemployment benefits fund.
How to Process Payroll and File State Payroll Taxes
Processing payroll taxes in your state is a necessary part of running your business. As a business owner, it’s important to learn about each state’s withholding requirements and unemployment insurance taxes. Doing so makes sure that you stay compliant with federal, state, local, and SUTA laws.
Businesses usually outsource processing payroll and remitting state and federal taxes to a professional payroll service. You can also use online payroll software, such as Quickbooks, to simplify the task. The software integrates with your business’ bank(s) to automatically process payroll and remit state and federal taxes for you.
Once you outsource the task of processing payroll, you must supervise your process. You can do this by looking at reports generated from your payroll software or listening to audio calls made by the payroll service. You can also request that your payroll vendor conduct research on SUTA and state withholding taxes.
The Payroll Process
Processing payroll is a multi-step process. After you collect your employee’s payroll information, you must enter it into the online payroll software. Next, you prepare and print paychecks for each of your employees.
Step 1: Collect Employee Payroll Information
The first step is to collect the necessary information for each employee whose paycheck you will process. Employers collect this information during an interview or job application. You’ll need to collect the employee’s social security number, occupation, annual salary or hourly wage, and any additional taxes they’re required to pay.
Step 2: Enter Payroll Information into Software
Most payroll services require employers to enter each employee’s payroll information. This information includes their name, address, occupation, gross wages/salary, and state withholding information. To do this, you’ll need to create a new employee in the payroll software and enter their relevant information.
Step 3: Prepare Paychecks
You must then print single or multiple paychecks for each of your employees. The federal law requires employers to provide each employee with a pay stub that includes all necessary information, including their gross earnings, hourly wage, deductions, and net pay.
- For hourly employees, you’ll also need to include their hours worked and hourly rate.
- You’ll need to provide information on their annual earnings and the number of paychecks they receive each year for salaried employees.
Deduct the employee’s SUTA, federal, and state taxes from their paycheck where applicable. For federal taxes, refer to the W-4 form filled out by the employees.
For state taxes, refer to your payroll software based on the information provided by each employee. Employers can also take other deductions, such as FICA taxes and 401(k) contributions from their paychecks.
Once you’ve deducted all taxes and other deductions from the employee’s gross earnings, you must compute their net pay. The net pay is the total amount of money that your business will transfer to the employee. This process is automatic if you are using top-of-line payroll software or payroll service.
Step 4: Issue Payments
Issue the paycheck to the employee, either in person or by mail. You can also pay employees electronically via direct deposit if you have their permission and bank information.
Step 5: Tax Filings
You must report taxes deducted from your employees’ paychecks to the IRS and state tax agencies. You have to report the SUI, Medicare, and social security taxes to the relevant state or federal agencies.
How to Calculate State Payroll Taxes
While most payroll software will calculate the state payroll taxes for you, employers need to understand how states and federal laws determine how much they must deduct and what they can deduct.
Note that the state doesn’t withhold Medicare and social security taxes from employees’ paychecks. Instead, the federal government requires employers to deduct these taxes and file them to the IRS.
Calculate State Unemployment Taxes
State unemployment tax rates vary by state. You can get more information on state unemployment taxes from your local Department of Labor or State Employment Agency.
Most states require that employers pay the SUTA tax every quarter of the year. For instance, employers within California must pay the SUTA tax in four equal quarterly payments. (30th April, 31st July, 31st October, and 31st January)
There are two crucial things you need to know before calculating SUTA taxes.
- The taxable wage base for your employees
- State SUTA tax rate
The taxable wage base is the maximum amount of an individual’s gross wages subject to SUTA tax. This amount varies from state to state. For instance, in California, the SUTA tax base is $7,000.
The SUTA tax rate is the percentage of an employee’s taxable wage base that you must deduct from their paycheck. The state may increase or decrease your SUTA tax depending on the number of your former employees filing for unemployment.
To calculate the SUTA tax, take California, for example. The taxable wage base for California is $7,000, and the state tax rate is 3.4% for the current tax year.
Suppose you have four employees:
$7000 per employee x 4 x 0.034 = $952
You will have to pay SUTA taxes of $952 to the California Employment Development Department for that year.
Calculate State Withholding Taxes
State withholding taxes vary from state to state. The withholding tax can also vary depending on the employers’ situation, such as sole proprietorship or LLC business entity. The marital status of employees may also affect withholding taxes.
In most states, employers must make state withholding taxes deductions from their employee’s paycheck weekly or every other week. The state will tell you how often and how much to withhold from your employees’ wages in your state withholding tax table.
Depending on the state, you may have to prepare a quarterly or monthly report of withholding deductions and submit it to the department of revenue for that state.
Consult your state withholding tax table to find out how much to withhold from your employees’ paychecks.
Multistate Payroll Tax Compliance
Doing business in multiple states or having employees in different states is a sign of growth and success. However, it also means that you have to deal with multiple state tax agencies.
Multistate payroll is when you have employees in more than one state or working in a particular state and living in another. Compliance with payroll taxes in multiple states is a complex process. It requires data collection, record keeping, and reporting to avoid penalties.
With the advent of the Covid-19 pandemic, businesses had to deal with remote employees. More complexities arose as companies had to make additional considerations when filing payroll taxes.
Crucial Concepts for Multistate Payroll Tax Compliance
Employers have to manage different sets of payroll information and files for other states. They also have to consider differing state tax rules and reporting requirements. It’s not enough to report the taxes that you pay. You have to do it accurately, on time, and in compliance with the law.
There are three concepts employers need to understand to handle multistate payroll effectively:
- Economic nexus
- Reciprocity agreements
- Non-resident taxation policies
Nexus
Nexus is the term used to describe the connection between a business or entity and a state. A state considers the presence of an economic nexus as sufficient justification for imposing its taxes on that business or entity. When a company has an office, factory, or store in a particular state, it triggers a nexus.
As a rule of thumb, the employer should withhold tax for where the employee lives. According to each state’s tax rules, if an employer has nexus with both states, he’s responsible for withholding tax in both states.
Reciprocity Agreements
Reciprocity agreements are between states that allow each other’s employers to withhold the employees’ taxes in one state without paying taxes in the employee’s work state. The main reason for these agreements is to make the taxpayer’s compliance tasks easier.
These agreements are in force in some states. The employer does not have to withhold tax from the other state or county where the employee works with reciprocity. The employer is not liable to pay the employee’s taxes to his home state.
Under a reciprocity arrangement, all states involved benefit from reduced tax liability and a simplified administrative system for their employers. A company that has employees in more than one state can significantly benefit from these arrangements.
Non-Resident Taxation Policies
Employers that have employees who live in another state or country should be familiar with non-resident taxation policies. A non-resident certificate, for that matter, is a document that employees who live in another state or country must complete and send to the employer.
For employees working and staying in states that lack a reciprocity agreement, employers have to look at each state’s tax laws. Usually, the state with jurisdiction for withholding tax is where the employee works and only applies to wages for services performed within the work state.
Payroll Tax Penalties
The IRS and state agencies have several guidelines and procedures to make sure that employers stay within the law. The IRS is stringent on payroll tax penalties. In extreme cases, the agency can even place a federal tax lien against your business or company, which may lead to the liquidation of assets.
Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty (TFRP) is an employer’s penalty for withholding or remitting payroll tax. The IRS can assess it against an employer for not withholding, paying over, and reporting social security, Medicare taxes on wages for employees. The purpose of this penalty is to guarantee that you’re funding your employee’s entitlement to their payroll tax benefits.
The amount of this penalty is 100% of the unpaid taxes. The IRS charges this penalty on the employee’s share of social security and Medicare taxes. You can reduce or eliminate this penalty if you have reasonable cause for not withholding the tax from your employees’ paychecks.
Failure to Deposit Penalty
The failure to deposit (FTD) penalty applies when an employer doesn’t fulfill his duty to deposit the payroll tax into the federal or state’s trust fund. The IRS charges this penalty on you for not depositing the payroll tax, which is still owed to an employee’s designated state or federal trust up to six months after it became due.
Failure to File Penalty
The failure to file (FTF) penalty is a charge from the IRS for not filing your federal payroll tax return. This penalty may apply even if you’re not depositing or paying your taxes on time, as long as it applies to a month that you were required to file a return. The FTF penalty applies if you do not file Form 941 by the return due date, including any extension of time to file.
Failure to Pay Penalty
The failure-to-pay (FTP) penalty is applied when your company doesn’t pay payroll taxes on time. The FTP rate is 0.5% of the unpaid taxes for each month or part of the month that they’re overdue. You may also be charged a late payment penalty if you file your return by the due date but don’t pay all delinquent taxes on time.
Failure to file FICA Tax Return
If you do not file your FICA tax return, you should know that the IRS can charge you a penalty. The amount will depend on when you file your FICA tax return. If your tax return is filed 16 days after the due date or ten days after the notice date, the penalty can go as high as 15% of the unpaid FICA.
Late Filing of State Unemployment Taxes
The SUTA tax filing is a complicated process, and most employers who hire employees fail to file this tax return on time. Employers that don’t pay or deposit their SUTA tax liability when due (including extensions), plus all applicable penalties and interest, can be charged by state agencies with late payment penalties.
How to Avoid Stay Payroll Tax Penalties
Tax penalties are inevitable for any company that doesn’t follow tax laws. Most of these penalties apply to businesses or employers who fail to pay their payroll taxes, withhold it from employee wages, and report the withholding on Form 941.
Here are some ways you can avoid severe penalties:
Calculate Your Payroll Taxes
Calculating your employee’s payroll taxes is a complex task. It entails many steps, from computing the withheld amount to completing IRS Form 941. To avoid penalties, ensure that you file and pay your withholding taxes on time.
Use Payroll Software
Payroll software can help you manage your company’s payroll taxes. It saves time and effort because you won’t have to do the tedious withholding tax calculations anymore. The software will do all the calculations for you and will guide you when filing the tax returns.
Ask for Professional Assistance
You can avoid penalties when you ask for professional assistance with your payroll taxes. By hiring a qualified accountant or tax consultant, they can help you manage your business’ payroll taxes hassle-free by minimizing errors and ensuring that everything complies.
Maintain a Tracking System
Maintaining a tracking system of all the paychecks you’ve issued, payments made to employees, and withholding taxes can help you keep up with your IRS filing responsibilities. It will also help you track any tax issues and potential problems.
Book Your Taxes as an Advance Payment
You can avoid penalties if you book your withholding taxes as an advance payment. It applies to those who will be filing and paying their taxes quarterly or monthly. By booking the withholding tax ahead of time, you ensure that you have fulfilled your obligation before the due date, so it’s not late.
Follow IRS Circular E Guidelines
IRS Circular E is a guide used by businesses and employers to help them determine how much state and federal taxes should be deposited or paid. Maintaining a calendar with the due dates for each tax ensures that you’re filing your tax returns and paying your taxes on time.
File an Extension When You Need to
Many business owners fail to file and pay their taxes on time because they think they will file the tax return within the ten-day extension period. However, remember that even if you don’t complete your tax return in that time, you can still get in trouble with penalties.
To avoid these penalties, submit your state and federal employment tax returns even if you can’t meet the extended date. You can get a six-month extension for filing your federal tax return.
Payroll Software with State Tax Filing
To automate your state payroll tax filing, you need a comprehensive and premium payroll software program. Payroll software will not only help file your taxes automatically but also produce the required reports, run the calculations for tax liabilities, and prepare a pay statement to show what you’ve paid in taxes.
Paychex
Paychex is a top-of-the-line payroll software that can handle your payroll taxes. It covers all the major features required for running your business, including taxes, HR, and employee management. Paychex is also flexible enough to be customized to meet the particular needs of companies and employers.
Pricing starts from $39 per month + $5 per employee per month. However, there’s an additional fee for multistate employers. If you want to try it out for free, there’s a 30-day trial.
Gusto Payroll
Gusto is another payroll software that offers online and mobile payroll services plus automatic payroll tax administration. Bent on making running local, state, and federal payroll taxes easier; Gusto offers a comprehensive payroll product that is straightforward to use.
What makes Gusto the best is that it offers these features free of charge, with an additional per-employee fee for premium features such as dependents and direct deposit. Its pricing starts at $39 per month + $6 per employee per month.
OnPay
OnPay is an all-in-one payroll software that can integrate quickly and smoothly with QuickBooks, Xero, and Freshbooks. They offer the best solution for small businesses and non-accountants, and it’s straightforward to use.
State and federal payroll tax administration also covers the filing of state payroll tax returns and making sure they are submitted on time. For a multistate business or employer, there’s a need for a software program that can handle your state payroll tax returns like OnPay.
ADP
Most entrepreneurs consider ADP the best payroll software for small and medium-sized companies. It has features that can meet the needs of small businesses and organizations, but it’s also scalable enough to grow with you.
ADP payroll software offers state tax filing for free if you are only in one state, but there are fees if you have employees in another state or need multistate tax filing services.
Contact a sales representative to get more information on pricing and features.
SurePayroll
For a flexible, easy-to-use, and seamless software that can handle your payroll tax administration, the SurePayroll software is best. It’s tailored just for employers with minimal management skills to provide greater time to focus on their business. It’s cost-effective payroll software, but you have to fill a short form to get a quote.
Stay Payroll Tax Guide (FAQs)
Answer: Payroll taxes aren’t solely state-based. The federal administration also implements payroll taxes. However, certain states have additional taxes for income and employment as well as state fees. The IRS issues a payroll tax guide to help you understand and handle your federal and state taxes.
Answer: Different states have different rates of payroll taxation. However, this doesn’t change a lot of things about your federal and state taxes. Your employer’s responsibility is still to withhold federal taxes from your wages. To get a complete understanding of your state payroll tax guide, you have to reach out to the state agency responsible for taxation.
Answer: The employer is responsible for submitting the state payroll tax return using the correct forms and paying any balance owed. The employer’s responsibility doesn’t end just because you submit the form. If there are adjustments, the employer has to make corrections on the current year’s tax returns.
Answer: The federal payroll tax entails Medicare, Social Security, and other federal taxes. The employer is responsible for withholding and depositing these taxes with the IRS every month. The state payroll tax entails the SUTA tax. The employer pays the SUTA tax on time, but it’s different from federal payroll taxes.
Answer: Some states tax you based on your residence, not where you work, while others tax you based on your work location. Depending on the tax laws of both states, your tax liability may change. However, expect to file taxes for both states. In states with no reciprocity agreements, your tax obligations will be to the state in which you work.
Conclusion
Payroll taxes are an integral part of running a business. The process of filing your state payroll tax returns can be overwhelming, but it doesn’t have to be. By following this state payroll tax guide, you can simplify your state tax filing and pay the taxes due.
Note that failure to file or pay your state taxes on time incurs penalties. Even a one-time failure to file or pay can result in interest penalties. If you are late, call the state payroll tax office and ask about filing an extension. The state will tell you if they allow extensions, the amount of time an extension is granted, and any penalties incurred due to filing late.
Speak with your accountant or advisor for more details on choosing the right payroll software to submit your state tax returns. An excellent software will save you time, minimize errors, and make sure that you meet the payroll tax deadlines. Besides, it will help to reduce your overall tax costs. Look for software with a free trial period so that you can test its pros and cons before finalizing anything.
Further readings:
Utah Payroll Tax and Registration Guide