Payroll tax filing is an important task for any business. Failing to file and pay taxes on employee earnings can have major consequences for your company, so it’s important that you understand exactly what your obligations are, and how to best go about managing them.
Employers are required to file both federal and payroll taxes. Federal payroll taxes, which include income, Social Security, Medicare, and in some states, unemployment, taxes are standard no matter where you do business. State and local taxes, on the other hands, vary according to your location. By working with a payroll company, you can eliminate much of the guesswork when it comes to filing state and local payroll taxes, but to get you started, here are some of the most important things that you should know.
Generally speaking, if you have to pay personal income tax in your state, you need to pay state payroll taxes. Currently, the only states in which you are not responsible for filing state payroll taxes are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. However, even if you do not have to pay a state payroll tax, it is possible that you’re still obligated to file a local tax. Research your local laws to determine if your city or county requires a local payroll tax filing.
The amount of tax you need to withhold from your employee’s pay varies by state. Some states, like Arizona, use a percentage calculation, in which the withholding amount is determined either by a percentage of the employee’s gross taxable earnings, while other states use a flat withholding percentage, regardless of earning amount; for example, Illinois businesses must withhold 4.95 percent of earnings for state payroll taxes, while Pennsylvania withholds 3.075 percent. Supplemental or bonus earnings, such as overtime or annual bonuses, are also taxed in most states, typically at a flat rate that may or may not me the same as the standard rate.
The majority of states, however, use tables to determine the amount of state payroll tax to withhold, in which the exact amount to pay is determined by the amount earned and the applicable tax bracket. The same applies to local taxes: If you need to file local payroll taxes, you’ll need to follow the municipal guidelines for calculating the proper amount.
State and local payroll taxes are filed with the appropriate revenue agencies. Most states require businesses to file payroll taxes if they have one or more employees in the state, and they are required to issue a W-2 Wage and Tax Statement at the end of the year. If you have contract employees to whom you will issue a 1099 at the end of the year, you do not need to withhold state payroll taxes on their behalf.
To file taxes, you need to apply for an employer withholding account with the appropriate state. In most cases, you will use your federal employer identification number (EIN) to establish this account. When it’s time to file your state payroll taxes, you will do so under this account number. If you don’t file for a withholding account in your state, and you are required to, you could face significant penalties. In Idaho, for example, businesses that do not establish a withholding account when required are subject to a fine of $100 per day that they don’t have the account.
Depending on your state and the amount of tax you’re paying, you will need to submit your withholdings weekly, biweekly, monthly, or quarterly; some small businesses are able to file annually if they meet certain qualifications. Many states offer the opportunity to take care of this online, and pay via electronic transfer or credit/debit card. You may also be able to file on paper. However, it’s vital to pay on time, since late and partial payments are subject to interest and penalties, which can add up quickly.
One common question regarding state payroll taxes is how to handle employees that reside out of state. The rules are complex.
Generally speaking, when a company has employees who live out-of-state, the business is required to set up accounts in both the state in which the company is located and the state where the employee lives. However, only in Arizona, District of Columbia, Hawaii, Maryland, Michigan, Montana, New Mexico, Oregon, and Wisconsin are employees required to pay state income taxes to both states. In California, Connecticut, Delaware, Indiana, Iowa, Kansas, Kentucky, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oklahoma, Rhode Island, Utah, Vermont, and Virginia, employers need to withhold state taxes for both states, but only to the extent of the difference of in the withholding. For example, if a Maine resident works in Massachusetts, he or she will pay the full amount of the state tax to Maine, and then a smaller amount to Massachusetts to make up the difference in tax rates.
Further complicating matters are the states that do not withhold state taxes. If your employee lives in a state that does not have state income taxes, do not withhold taxes. There are also some states that do not withhold taxes for residents who work in another state; Alabama, Arkansas, Colorado, Georgia, Idaho, Illinois, Louisiana, Mississippi, Missouri, North Carolina, North Dakota, Ohio, Pennsylvania, South Carolina, and West Virginia only require residents to pay taxes to the state in which thy work. Some states also have reciprocity agreements with neighboring states, meaning that an individual who works in a different state than his or residence will only pay tax in the state of residence.
Clearly, managing state payroll taxes is complex, and there are a number of rules and exceptions to those rules that employers must follow. The potential pitfalls and penalties associated with getting it wrong can be devastating to your business, so it’s a good idea to get professional help from National PEO with your withholding.Back to blog list