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The payroll tax is a type of social security or retirement tax that employers place on their employees. The amount the employer pays depends on the state where they do business and how much money the employee made during that year. In 2021, despite President Trump’s recent changes to federal income tax rates for individuals, which will result in significantly lower individual income taxes for most workers offset by new Medicare and Social Security taxes, states are expected to make significant increases in some key areas including unemployment insurance (UIB), paid family leave benefits, motor vehicle registration fees
and more.
Payroll taxes are paid by both businesses and workers. The IRS sets federal tax rates such as income tax, Social Security (6.2 percent for both employer and employee), and Medicare (1.45 percent). Each state, on the other hand, sets its own tax rates. A state-by-state map of tax rates, including additional taxes and workers’ compensation, is shown below.
If a person earns more than $200,000 in a calendar year, an extra 0.9 percent Medicare tax must be deducted.
What is the Difference Between Federal and State Payroll Taxes?
Payroll taxes are divided into two categories: employer-paid taxes and employee-paid taxes. You, as the employer, are responsible for withholding and remitting your employees’ taxes due from their paychecks, as well as any amounts you owe, to the appropriate tax agency.
Employees are responsible for paying federal and, if appropriate, Income Taxes in the Different States. Depending on where your company is located and where your workers live, you may additionally be required to pay and/or withhold taxes on the local level. Both you and your workers pay federal Social Security and Medicare taxes (Federal Insurance Contributions Act or FICA), and both federal and state unemployment insurance taxes fall on you; but, if you pay federal taxes on time, you may enjoy a lower state rate.
Payroll State Tax Rates in 2021
Payroll Taxes by State is a searchable database of state-by-state payroll taxes.
Payroll Tax Rates in the United States
In addition to income tax, there are two types of employment taxes at the federal level: FUTA and FICA. We’ll go over each one quickly since you’ll be using them to deduct taxes from workers’ paychecks. Regardless of the state in which you operate, you must pay these taxes on behalf of your workers.
- Income tax: The tax rate is determined by the withholdings selected on the W-4 form by the employee.
- FUTA: This 6% federal tax is intended to fund unemployment; in most situations, you’ll get 5.4 percent of this money back if you pay your state taxes on time, resulting in a net tax of 0.6 percent.
- FICA (Federal Insurance Contributions Act): This 15.3% federal tax is split into two parts: 12.4 percent for Social Security and 2.9 percent for Medicare. The Medicare tax rate increases by 0.9 percent for workers earning more than $200,000; hence, FICA may vary between 15.3 percent and 16.2 percent.
Payroll Tax Rates by State
Some states (such as Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) have an income tax, whereas others (such as Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) do not. Tennessee and New Hampshire are the only states that tax investment income but not personal income taxes. State unemployment taxes, on the other hand, are imposed in every state.
The proportion of people who use SUTA varies by state. The pay base or minimum earnings necessary for SUTA deduction is determined by each state. Others could call it unemployment insurance (UI).
SUTA rates are also influenced by an employer’s unemployment history and sector. Furthermore, some jurisdictions issue a general new employer rate that may be greater or lower than what the company will pay after a period of time, the length of which is determined by each state. If one employer pays a greater unemployment rate than another, for example, that firm will pay a higher unemployment rate.
Consider the following two examples:
Example of a California Payroll Tax Rate
For workers earning more than $7,000 per year, new companies must pay SUTA of 3.4 percent. SUTA has been renamed State Unemployment Insurance (SUI). Existing employers pay between 1.5 and 6.2 percent, depending on the length of time they have been unemployed. Those that fire or lay off fewer workers often have a lower rate. These taxes are in addition to the FICA and FUTA taxes that all employers in California and the rest of the country are required to pay.
Example of a New York Payroll Tax Rate
For workers earning over $11,100 per year, new employers must pay 3.13 percent in SUTA. It’s known as the Unemployment Insurance Contribution Rate (UICR) (UI). Employers now pay between 0.06 percent and 7.9 percent. Employers who have a low number of unemployment claims may pay approximately ten times less than those that have a large number of claims. It pays to lower your turnover in New York, as it does in most states.
Other Payroll Tax Rates by State
Nevada and New Hampshire, for example, have no extra employment taxes. They are, however, the exception. Income taxes in the different states, supplementary taxes, and taxes such as workers’ compensation, Disability, and municipal taxes are all common in most states.
Income Taxes in the Different States
The majority of states levy an income tax. They use withholding tables to tax a percentage of an employee’s income. Each state determines its own withholding tax rates, such as 0.08 percent to 5.1 percent in Arizona, based on the number of deductions an employee is entitled to.
Taxes on the local level
In states with large urban areas, you’ll often find taxes on the local level added to your employment tax requirements. For example, San Francisco, Denver, and Newark require employees to pay local income taxes. Other states like Kentucky, Ohio, and Pennsylvania collect local income taxes in many cities.
Supplemental
Supplementary salaries, including bonuses, commissions, overtime, and severance compensation, are taxed in several jurisdictions. Only about half of the states in the US have no supplementary tax, while the remainder have rates ranging from 1.84 percent to 11 percent, with the exception of Vermont, which has a 30 percent rate. In California, for example, most supplementary pay is taxed at 6.6 percent, while supplemental pay earned via a bonus or stock option is taxed at 10.23 percent.
Compensation for Employees
Compensation for Employees is purchased as private insurance by business owners in most states. However, states like New Mexico, Oregon, and Washington require it to be paid as a tax. As an example, Oregon employees pay 1.1 cents per hour while their employers match that rate for 2.2 cents an hour paid to Oregon to cover state-managed Compensation for Employees.
Disability
Disability insurance differs from Compensation for Employees, which covers on-the-job injuries only, by covering all injuries and health issues that affect a worker’s ability to work. Some states like California, Hawaii, and New York ensure that workers in their state have Disability insurance coverage. Therefore, that additional insurance is included as a tax in those states. It ranges from 0.26% in New Jersey to 1.30% in Rhode Island.
Paid Time Off
Some states have begun to mandate employer-provided sick leave or paid sick time off, which means it operates as a tax. New York, for example, deducts 0.27% of the employee’s wages each pay period to cover Paid Time Off for employees in that state. If your business operates in the following states, they have existing paid sick leave laws to follow.
How to Pay Payroll Taxes at the Federal and State Level
Even if you’re only obligated to transmit payment monthly, it’s essential to put aside money for employment taxes each pay period. You should absolutely need to deduct money from your workers’ paychecks on a regular basis.
You will need to deposit payroll taxes either monthly or semi-weekly. If you owe $50,000 or less in taxes for the previous year, you may pay monthly; if you owe more, you’ll have to pay semi-weekly. If you’re a new employer, you’ll be put on a monthly deposit plan right away. Deposits may be made quarterly with the 941 tax return for companies with a small payroll tax due (less than $2,500 each quarter).
Due Dates for Federal Employment Taxes
If you decide that your firm requires a monthly payment schedule, you must deposit your employment payroll taxes (FICA and federal income taxes) by the 15th of the following month. Taxes on salaries earned on Wednesday, Thursday, or Friday must be paid by the following Wednesday on semi-weekly schedules. Tax payments for salaries received on other days of the week must be made by the following Friday.
Deposit Schedule (Semi-Weekly)
One thing to keep in mind is that regardless of your deposit plan, if you accrue $100,000 or more in taxes, you must deposit them by the following business day.
Payroll taxes should be deducted from employee paychecks.
When you compute your workers’ paycheck amounts, the amount they made vs. the amount they should get, you should transfer the money they owe in taxes to a different account (assuming you’re paying payroll and general company costs from the same account). You must make certain that the cash is not spent inadvertently.
Filling Out Tax Forms
You’ll need to use special payroll tax forms to submit employment taxes with the IRS and other authorities so it’s obvious what and how much you’re paying; the forms feature formulae that will help you figure out how much you owe, and the standard reporting requirement is quarterly or yearly.
When filing your employment taxes, you’ll require the following payroll forms:
- For federal income and FICA taxes, use IRS Form 941 or Form 944.
- For federal unemployment taxes, use Form 940.
- If your state has income and/or disability tax forms, fill them out.
- If relevant to your locality, municipal, or local tax forms
To avoid interest and penalties, and to stay in compliance with payroll rules, you must deposit the taxes before the due date. You won’t have to pay or file taxes for independent contractors, but you will have to provide a 1099 form to the IRS (and the contractor) to demonstrate the total profits you paid them during the year.
Consequences of Failure to Make or Late Payments on Employment Taxes
Employers that fail to remit payroll tax payments or do so late may face the following consequences:
- Employers may be subject to criminal and civil penalties.
- Employees may lose their Social Security or Medicare benefits in the future.
- Employees may lose their unemployment benefits in the future.
You’ll be penalized if you don’t make your FICA or federal income tax installments on time.
Complexities in Payroll Tax Rates
Each state determines whether or not to levy a state income tax, when payments are due, what rates are used, and what paperwork must be filed. Below, we’ll go through some of the distinctions so you know what to expect in each state.
States with a Personal Income Tax
A state income tax is not imposed in every state. In jurisdictions where this is the case, the employee must be asked how much to deduct from their paycheck. The employer is required to withhold that amount and pay it to the state. The rate of income tax varies by state and by individual depending on criteria such as marital status and the number of exemptions claimed.
Employees provide this information on the equivalent of a federal W-4 form, which may be called by a different name in each state. For example, South Dakota has no income taxes, while North Dakota does and uses the Federal W-4 to track withholdings. New Jersey also has state tax withholdings and tracks them on a Form NJ-W4.
Due Dates for Quarterly Tax Payments
If you owe more than $500 in taxes each quarter, you must file quarterly FUTA taxes. The following are the deadlines:
- The first quarter ends on April 30th.
- The second quarter ends on July 31.
- The third quarter ends on October 31st.
- The fourth quarter begins on January 31st and ends on March 31st.
SUTA tax due dates, on the other hand, vary per state. In Michigan, for example, taxes are due on the 25th of the month rather than the last day of the month: April 25, July 25, October 25, and January 25. Failure to fulfill the deadline may result in a penalty or interest charge for late tax payments. As a result, you must know not only what taxes to withhold and pay, but also when and how to do so—state by state.
States with Lower Credit Limits
When states couldn’t satisfy their unemployment obligations in the past, they turned to the federal government for help. Instead of a 5.4 percent credit reduction, some companies had their credit deduction cut by as much as (and occasionally more than) 2.1 percent, depending on the state they were in. However, as of 2021, the only credit reduction state is the Virgin Islands, which is a territory rather than a state. It has a credit decrease of 3.3 percent, and it will stay in this status until November 10, 2021, if it does not return the debt.
Employers may obtain a credit of 5.4 percent when they submit Form 940 (PDF), Employer’s FUTA Return, resulting in a net FUTA tax rate of 0.6 percent (6.0 percent – 5.4 percent = 0.6 percent), according to the IRS.
That implies that if you hire workers in the Virgin Islands, you’ll likely pay greater taxes since the credit reduction increases by 0.03 percent each year, increasing your tax by that amount each year.
California, Illinois, Massachusetts, New Jersey, and New York are among the states that have taken out federal unemployment loans as of January 28, 2021. The Virgin Islands will no longer be the lone credit reduction state if these debts are not resolved by 2022.
Payroll Tax Avoidance
Independent contractors are a good option for business owners who don’t want to deal with payroll taxes. Freelancers and gig workers are self-employed individuals that work for you on a project-by-project basis. They aren’t workers, thus they are responsible for their own taxes. Simply formalize your work agreement in a contract to ensure that you and your coworker are on the same page about job expectations.
You’ll need to learn the standards for when you may pay a person as a contractor rather than an employee. Learn how to tell the difference between an employee and an independent contractor.
Conclusion
Paying your payroll taxes correctly and on time is an important part of becoming a successful employer, but it can become challenging as you grow. Tax rates change from year to year, especially payroll tax rates by state, and you must keep track of them to accurately calculate your business and your employees’ tax obligations.
