The 3 Types of Payroll Taxes in the United States

Federal Income Tax in the US

Federal income tax is levied on:

• Individuals – U.S. citizens, residents, and certain non-residents earning income from U.S. sources.
• Corporations – Businesses organized under U.S. law or earning income within the U.S.
• Other Entities – Trusts, estates, and partnerships, though partnerships pass income through to partners who then report it.

Taxpayers are classified based on filing status: single, married filing jointly, married filing separately, head of household, or qualifying widow(er).

How Federal Income Tax is Calculated

Federal income tax is based on taxable income, which is determined by:

• Gross Income – Total income earned, including wages, dividends, business earnings, and other sources.
• Adjustments and Deductions – Subtractions like contributions to retirement accounts, student loan interest, or certain medical expenses.
• Tax Credits – Reductions in tax liability for specific expenses, such as education or childcare costs.

The U.S. employs a progressive tax system, meaning higher income levels are taxed at higher rates.

Federal Tax Brackets (2024) 

The IRS sets tax brackets annually. Here’s an example for 2024:

Income Range (Single Filers)

Brackets differ for other filing statuses, like married couples filing jointly.

Understanding State Payroll Taxes

When calculating payroll taxes, businesses must also account for state income taxes, unemployment tax (SUTA), and the potential for other applicable local payroll taxes (depending on the state or locality). The specific requirements can vary widely according to the state in which your business operates and where your employees reside. Knowing how these taxes work is the first step in managing payroll effectively.

State Income Tax

State income tax is a tax imposed by individual states on employee income. The rate at which income is taxed varies depending on the state, with some states using flat income tax rates, while others have progressive tax systems. A breakdown by state can be found here.

How State Income Tax Impacts Payroll

For employers, state income tax directly impacts payroll calculations, as a portion of each employee’s earnings must be withheld and remitted to the state government. Employers are responsible for withholding the correct amount of income tax from their employees’ wages, which requires a clear understanding of the state’s tax laws. Employers must also ensure they remain compliant with state tax filing deadlines to avoid penalties.

States Without Income Tax

Several states in the U.S. do not impose a state income tax, making them attractive to both employers and employees. These states include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. For businesses, operating in states without income tax simplifies payroll tax calculations, as there is no need to withhold income tax from employees’ wages.

Income Tax Exemptions and Their Benefits

The primary benefit of working in states without income tax is the reduced administrative burden for employers. Without the need to calculate and withhold income tax, payroll processes are more streamlined. Additionally, employees in these states may find their take-home pay higher, which can be an attractive benefit when hiring top talent.

States with Flat Income Tax Rates

Some states implement a flat income tax rate, meaning all employees, regardless of income level, are taxed at the same rate. States with flat income tax rates include Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah. These rates are more straightforward for employers to manage because they do not change based on the employee’s earnings.

Examples and Flat Tax Benefits

In states like Illinois and Michigan, the flat tax rate is straightforward for businesses to apply, as all employees are taxed equally. Flat tax rates reduce the complexity of payroll tax calculations, making it easier for companies to comply with state tax regulations. For businesses with employees in multiple states, managing payroll taxes in flat-tax states can be less time-consuming compared to states with progressive tax systems.

States with Progressive Income Tax

Other states use a progressive income tax system, where employees are taxed at different rates based on income. States with progressive income tax include California, New York, and New Jersey. In these states, employees earning higher wages are taxed at a higher rate than those with lower salaries.

How Progressive Tax Systems Work by State

In states with progressive income tax, the tax rates increase as an employee’s income rises. For employers, this means more complex payroll tax calculations, as they must account for multiple tax brackets when determining the correct amount to withhold from employees’ wages. Payroll software or tax management tools are often used to simplify these calculations and ensure compliance.

State Unemployment Tax (SUTA)

The State Unemployment Tax Act (SUTA) is a tax imposed on employers to fund state unemployment programs. The SUTA tax rate varies by state and is typically based on the wages paid to employees and the employer’s experience rating, which reflects the employer’s history of claims filed by former employees.

SUTA Requirements and Rates by State

Each state sets its own SUTA tax rates, generally paid solely by the employer, although some states also require employees to contribute. Different rates according to each US state can be found here.

The rate can also vary significantly depending on the employer’s industry and history of unemployment claims. New employers typically start with a default rate, which is then adjusted over time based on their experience rating. To remain compliant, employers must regularly submit SUTA tax payments to the state as part of their payroll process and ensure they meet reporting requirements.

Local Taxes

In addition to state income tax and SUTA, some states and municipalities impose local payroll taxes. These taxes are typically levied by cities, counties, or school districts and may vary based on the employee’s place of residence or work location.

Which States Require Local Payroll Taxes?

Local payroll taxes are not imposed by all states, but several, including Pennsylvania, Ohio, and New York, impose additional layers of local tax jurisdictions. In these states, employers are responsible for withholding and remitting local payroll taxes in addition to state and federal taxes. These taxes are often used to fund local services such as schools, infrastructure, and public safety, and the rates can vary based on the specific municipality or district.

Overview of Payroll Taxes by State

Payroll taxes vary widely across the United States, with each state having its own rules for state income tax, unemployment tax, and other payroll-related taxes. Understanding the differences between states helps businesses plan their tax responsibilities effectively, especially if they operate in multiple locations.

Other State-Specific Payroll Tax Considerations

In addition to income and unemployment taxes, some states have unique payroll tax regulations that businesses must be aware of. For example, states like California and New Jersey have disability insurance programs funded by payroll taxes, while others impose temporary disability insurance or family leave insurance taxes. Employers should familiarize themselves with these state-specific payroll taxes to ensure full compliance.

Unique Payroll Tax Regulations

Each state may have additional payroll taxes or tax credits available to businesses. For example, some states offer payroll tax incentives to encourage job creation or hiring in specific industries.

It’s therefore vital for companies to stay informed about these regulations to take advantage of any potential tax savings or to avoid unexpected liabilities.

Payroll Reporting and Filing Requirements by State

Payroll tax reporting and filing requirements vary by state, and businesses must stay on top of these deadlines to avoid penalties. Understanding the key deadlines and using payroll management tools can help ensure compliance with state tax laws.

Key Deadlines for State Payroll Tax Reporting

Most states require payroll taxes to be reported and filed every quarter, though some states have monthly or annual filing requirements depending on the size of the business and the amount of payroll taxes owed. Employers must submit tax filings and highlight withheld amounts from their employee’s taxable income to the state’s tax authority on time to avoid penalties and interest charges. Keeping track of state-specific deadlines is essential to ensure compliance.

Simplifying State Payroll Taxes for Businesses

Navigating payroll taxes by state can be overwhelming, especially for small businesses or companies that operate in multiple states. Fortunately, some tools and solutions can simplify the process, making it easier to manage payroll taxes, stay compliant, and avoid penalties.

Automating Payroll Tax Calculations

One of the best ways to simplify payroll tax management is through automation. Payroll automation tools help businesses automatically calculate and remit taxes to the appropriate authorities, reducing the chances of errors.

While it may require payroll-specific tools or technology that isn’t necessarily going to be the best option for every individual employer, automation can ensure that tax filings are submitted on time, reducing the stress of keeping track of multiple deadlines.

Time Clocks, Scheduling, and HR Management Apps

Many payroll management tools offer additional features like time clocks and scheduling, which can help businesses accurately manage employee hours and calculate payroll.

Some tools or payroll outsourcing services providers may provide time-tracking features that integrate with payroll systems around the world, ensuring employees are paid correctly for hours worked. These tools also offer HR management features, such as benefits administration and employee onboarding, which can further streamline business operations.

Conclusion – Let INS Global Help you With Local Payroll Needs

Managing payroll taxes in the United States requires a thorough understanding of the various state and local tax regulations that apply to your business. From calculating state income tax to meeting SUTA requirements, businesses must ensure compliance with tax laws in every state where they operate.

Using payroll automation tools and management software can simplify the process, reduce the risk of errors, and ensure that taxes are filed on time. By staying informed about state-specific payroll tax regulations and leveraging the right tools, businesses can manage payroll taxes more efficiently and remain compliant with federal, state, and local tax laws.

Contact our team of US payroll experts to learn more about how INS Global can guarantee compliance for all your local employment operations.