State Payroll Tax

What Employers Need to Know About State Payroll Taxes

Payroll tax reporting is one of the many payroll functions that most employers dread. The task requires a thorough understanding of state and federal guidelines as well as an attention to detail. Not only must employers account for the federal taxes and assessments, but employers must also file the state taxes. Here are some of the items included in state payroll taxes.

Employee State Income Tax Withholding

As a rule, employee payroll is reported as gross pay less payroll deductions resulting in the employee's net pay. In addition to federal payroll deductions for income tax, Social Security and Medicare taxes, employers are required to deduct amounts for state and local income taxes. Each state has its own guidelines regarding deductions and allowances which may differ from the federal guidelines. In addition, many employers employ people who are permanent residents of a neighboring state. Particular care should be taken to ensure that withholding is done correctly based on reciprocal agreements that may be in place between neighboring states.

State Unemployment Taxes

Every state in the United States requires employers to pay state unemployment taxes known as SUTA. SUTA tax rates differ in each state and each state has its own payroll cap which should be used to calculate the amount of SUTA due. Unemployment taxes are calculated based on actual employee salaries and then modified by a multiplier which reflects the employer's unemployment experience rating. These costs are to be the burden of the employers and are not to passed along to employees.

Steps to take to satisfy state payroll tax reporting:

• Determine which employee wages should be used to calculate state income tax which may not be the same as the federal guidelines.
• Determine how nonresident state tax withholding should be handled by your state and neighboring states, if this applies.
• Keep state withholding tables up to date as requirements often change.
• Set up the accounts with the state to deposit withholding deducted from employees. Most states do use electronic filing.

Calculating and deducting state payroll taxes is similar to filing and reporting federal payroll taxes. It should be noted that the requirements are not always the same. Employers should take care to follow the guidelines set forth by their state. Employers should contact their state tax division for more information and guidelines for complying with local and state payroll tax requirements.