In this article:
Overview
Employers are subject to the state payroll tax laws imposed by the state having jurisdiction on the wages generated. Payroll tax laws vary from state to state, however we are providing you here with a conceptual state payroll tax overview for you to understand how they generally work, so when you want to figure out the taxes imposed by a particular state you would know what to look for and ensure that you comply with the requirements of the state at issue.
State Unemployment Insurance
State Unemployment Insurance Explained:
State Unemployment Tax Act, commonly referred to as SUTA, is a tax which is imposed by each state on a base wage per year, per employee. Each state has its own imposed wage base and wage rate structure.
In most states, it is paid by employers only and not by the employee, with the exception of three states - Alaska, New Jersey, and Pennsylvania - which also impose a portion of the unemployment tax on the employees. States generally require employers to submit quarterly reports of contributions and gross and taxable wages.
Once an employer registers with the respective state where the work is performed, they are assigned a tax rate which each state determines based on many factors (i.e. experience rating, industry type, etc.). The employer is subject to that tax rate until the states updates the rate for the employer. Usually the rates are updated annually, mostly in the beginning of each calendar year. A handful of states do have an annual mid-year rate update and not a beginning year update.
Each state has a different wage base. Wage base is the first XX amount of wages per employee per year which is subject to unemployment taxes. Any wages earned in a given year above the wage base is no longer subject to the tax in that year. Each state also has their own starting rate which is the rate assigned to new employers.
State Income Tax
State Income Tax Explained:
Most states impose state income taxes on earnings which are earned through employment. There are currently 9 states which do not impose an income tax on employee earnings: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Each state has their own unique structure as it relates to actual rates, whether it’s different for each taxpayer or the same for all, and at what income level the rate increases, the exemptions available, and more.
Many states provide their unique W4 equivalent so the employee can provide the information relevant to the state. These states do not follow the federal structure and therefore a unique W4 is needed to determine how to tax the employee in that state.
When using payroll software, all you need to do is set up the employee in the state applicable to them and the particular exemptions or status the employee has selected in the state-equivalent W4 document. The rest gets calculated automatically.
Multi State Withholding's Explained:
Employers are required to withhold the taxes of the state where the work is performed, as that state has jurisdiction on the employer and the wages earned. The employee, on the other hand, is subject to the taxes both where he lives as well as where the work is performed.
If the employee works in a different state than they reside, they will end up paying at the end of the calendar year the higher of the 2 rates, but only once. The way this conceptually works is that let's say the employee resides in a state in which his tax rate is 10% but works in a state in which the tax rate is 7%, the employee will pay to the work state 7% and to his home state 3%.
That said, some employers withhold only the work state amounts and leave it to the employee to pay the additional amount to his resident state, while other employers would do the withholding of the resident state as well (either voluntary or because they must). As such, it is important for employers to know what they have to do and what the consequences will be to their employees and then decide what they want to do.
It is worthwhile to mention that many employees are not aware of this and can assume that the income taxes are taken care of, then at the end of the year they get a large bill from the state they reside in. Accordingly, while it is not the employer’s responsibility to take care of the employee’s tax obligations, it nonetheless might be ideal for employers to have this addressed by either doing the withholding or at least telling the employee to make sure he addresses it during the year. Doing so is a worthwhile step towards ensuring that your employees are happy and you retain them as an employee.
Reciprocal Agreements Explained:
Many states entered into some sort of agreement between each other, commonly referred to as a reciprocity agreement. Tax reciprocity is an arrangement between two states that lowers the tax burden on an employee. With an agreement in place, an employee is exempt from state and local taxes in their state of employment, thus only paying the taxes of the state in which he or she resides.
An employee must generally fill out a form to request that the work state withholding should not be withheld and only the resident state should be withheld.
Below is a list of states which have reciprocity agreements, with whom they have it and the form the employee will be required to fill out and give to their employer in order for the employer to implement the withholding per the reciprocity agreement.
|
Employee's work state |
Employee's resident state |
Form to complete |
|
D.C. |
With all 50 states but only one way, 2 states have a reciprocity with D.C. and they are Maryland and Virginia |
D-4A |
|
Illinois |
Iowa, Kentucky, Michigan, Wisconsin |
IL-W-5-NR |
|
Indiana |
Kentucky, Michigan, Ohio, Pennsylvania |
WH-47 |
|
Iowa |
Illinois |
44-016 |
|
Kentucky |
Illinois, Indiana, Michigan, Ohio, Pennsylvania, Wisconsin |
WH-47 |
|
Maryland |
Pennsylvania, Virginia, West Virginia |
MW507 |
|
Michigan |
Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin |
MI-W4 |
|
Minnesota |
Michigan, North Dakota |
MWR |
|
Montana |
North Dakota |
MT-R |
|
New Jersey |
Pennsylvania |
NJ-165 |
|
North Dakota |
Minnesota, Montana |
NDW-R |
|
Ohio |
Indiana, Kentucky, Michigan, Pennsylvania, West Virginia |
IT-4NR |
|
Pennsylvania |
Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia |
REV-419 |
|
Virginia |
D.C., Kentucky, Maryland, Pennsylvania, West Virginia |
VA-4 |
|
West Virginia |
Kentucky, Maryland, Ohio, Pennsylvania, Virginia |
WV/IT-104R |
|
Wisconsin |
Illinois, Indiana, Kentucky, Michigan |
W-220 |
Local Taxes
Local Taxes Explained:
On top of state level taxes, there are also taxes which are imposed at a local level within the state. Currently there are roughly 15 states in the US which impose local taxes. How they work varies from simple flat rates throughout a certain large city, to complex area by area rate differences. The states of PA and OH are known as the most tedious ones as there are way too many locales and rates and employers need to determine which one applies to each employee.
The specifics of each of the local taxes imposed is beyond the scope of this article, but it is important to be aware that they exist, so when you employ employees in these states you ensure that the local tax withholdings are also addressed. States that have local taxes at the time this article was written include the following; Alabama, Arkansas, Colorado, District of Columbia, Delaware, Iowa, Indiana, Kentucky, Maryland, Michigan: Missouri, New York, Ohio, Oregon, and Pennsylvania.
Conclusion
We have provided a conceptual overview of the obligations imposed on employees and employers in the United States. This is intended to provide a conceptual overview of the various obligations which are out there on the state and local level. If you have specific questions please contact our customer support team and they will provide you with the information relevant to your specific inquiry.