The rules for withholding federal payroll taxes are quite straightforward, applying to most employees in the United States, regardless of location. The rules tend to be more complicated on the state side, however, as they are location specific and may even include local tax withholding. Here’s a rundown of the various federal, state, and local withholding taxes.
Federal Income Tax
The Internal Revenue Service (IRS) administers federal income tax, which employers are supposed to withhold from their employees’ taxable wages. Generally, taxable wages are calculated by subtracting employees’ pretax and nontaxable payroll deductions from their gross wages.
Federal income tax withholding is based on the withholding conditions the employee states on his or her W-4 form, the employee’s taxable wages, and the IRS tax withholding table that matches the employee’s situation.
Social Security and Medicare Taxes
The Federal Insurance Contributions Act (FICA) regulates the collection of Social Security and Medicare taxes. For 2019, employers must withhold Social Security tax at 6.2 percent, up to the annual taxable wage limit of $132,900, plus Medicare tax at 1.45 percent. (For 2020, the limit goes up to $137,700.) Medicare tax does not have an annual taxable wage limit and therefore must come out of all taxable wages.
Employees who earn more than $200,000 for the year are subject to an additional Medicare tax withholding of 0.9 percent on the excess amount. (Thresholds may vary based on filing status.)
State Income Tax
The following nine states do not require state income tax withholding. (Note, however, that some of these states may tax income from non-wage sources.)
- New Hampshire
- South Dakota
In all other states, employers must take state income tax out of their employees’ taxable wages according to the rules of the state revenue agency.
Many states adopt a withholding model that is similar to the federal income tax withholding. The employer, however, must refer to the employee’s state withholding form and the state tax withholding tables. A few states, such as Pennsylvania and Alaska, require withholding based on a percentage of each employee’s taxable wages.
Local Income Tax
Some local governments within certain states impose local income tax on employees who live or work in the district. These taxes—which may appear as school district, city, and county taxes—should be withheld according to the specifications of the local tax assessor or state revenue agency. Certain localities in states, such as New York, Ohio, Pennsylvania, Maryland, Alabama, and Indiana, all require local income tax withholding.
Additional State-Based Withholding Taxes
In addition to state and local income tax, employers may need to withhold other types of state taxes besides state and local income taxes. In California, employers must withhold not only state income tax but also state disability insurance. The rules in New Jersey are even more extensive, requiring that employers withhold for state unemployment insurance, workforce development, state disability insurance, and family leave insurance.
Still not clear on your responsibilities? Call us today for additional guidance on payroll tax withholding!