Federal vs State Employment Taxes

Federal vs. State Employment Taxes: The Difference

The term ‘employment tax’ can refer to more than 30 different items, according to the official site of the IRS. That alone can seem complicated, and this is before we get into every single state’s own tax structure.

At Tax Reduction Concierge, we have various tax solutions to help your business decrease your tax liability over the long term. Our strategies include captive insurance, deferred compensation, and many other tactics to make sure you are not paying a dime more than you have to. Keep reading for our guide to federal vs. state employment taxes.

State Employment Taxes

Different states have different laws. Some states, like Florida, Texas, and Washington do not have any state income tax. Other states, such as New Hampshire and Tennessee, only tax income from interest and dividends.

Certain states, like California, have four different employment taxes. These payroll taxes are: unemployment insurance, the employment training tax, state disability insurance tax, and California Personal Tax. This means that people are in a better position should they be laid off, but they are paying a little bit more in taxes.

Our home state of North Carolina has state unemployment insurance. The exact amount that companies pay is determined by an employer’s reserve ratio percentage, which is the employer’s reserve ratio multiplied by .68.

Something you will have to consider is that states have different rules for what qualifies as income earned within the state, and income earned outside of it. For example, if someone lives in New Jersey and commutes to New York to work, you will probably pay employment taxes in New York. This is not always the case, however, and it is a good idea to consult with a tax professional.

Many people are worried that they will be double taxed. Most states have reciprocity agreements with surrounding states. It is likely that the reciprocity agreement means that you only get taxed where you work. Those who are commuting from several states away may not be covered, but that is not terribly likely.

Federal Employment Taxes

All employers must posit and report employment taxes. At the end of the year, every company must file Form W-2, Wage and Tax Statement. In general, employers must withhold federal income tax, Social Security and Medicare taxes, and an additional Medicare tax. Businesses need to report and pay the Federal Unemployment Tax (FUTA) tax. This is different, however, because employees themselves do not pay this tax, nor do they have it withheld from their pay.

Payroll taxes have become an increasingly large part of Federal revenues, coming in at over 20% of Uncle Sam’s income. Employment taxes, for the most part, are inherently regressive. Around two-thirds of Americans pay more in payroll taxes than they do in income taxes.

Failure to pay taxes in a timely fashion results in a fine between 2-10%. Penalties can (and do) become far more severe when taxes are not paid at all.

Meals, lodging, clothing, services, and other payments in kind are subject to Social Security and Medicare taxes, as a general rule. Meals are not, however, considered taxable if they are furnished for the employer’s convenience and on the employer’s premises. The same applies to lodging.

If you have any questions about employment taxes, contact Tax Reduction Concierge. Our innovative strategies have already helped many high-performing companies, and our next success story could be you. Schedule a live webinar with us to learn how to cut up to 45% off your tax bill.