State Taxes Overview
Each state has its own payroll tax rules. When you run payroll, you may need to pay or withhold several types of state taxes. The sections below explain the most common state tax types and what employers need to do to stay compliant.
When processing payroll, it’s important to understand the various taxes that may apply at the state level. Below are the most common tax types to help ensure compliance and accurate payroll processing.
-
State Unemployment Insurance (SUI) Tax
State Unemployment Insurance (SUI) is an employer-paid tax that is used to fund unemployment benefit programs in the state where employees work. In a few states, (e.g. Alaska, New Jersey, and Pennsylvania), both employers and employees are required to contribute.
Each state sets a wage base, which is the maximum amount of employee's wages that can be taxed for unemployment. Any wages earned above this base are considered excess wages and are no longer subject to SUI tax.
-
State Income Tax (SIT) or Personal Income Tax (PIT)
State Income Tax (SIT), also known as Personal Income Tax (PIT), is a percentage-based tax imposed on an employee's taxable wages. It is an employee-paid tax that is withheld by the employer and remitted to the appropriate state agency on the employee's behalf.
Typically, income tax is withheld for the state where the employee works. However, Reciprocity Agreements between states allow withholding for the state where the employee lives instead.
-
Paid Family Medical Leave (PFML)
PFML is a state-run program that provides paid time off to employees for family or medical-related reasons, such as the birth of a child, caring for a sick family member, or dealing with a serious health condition. The contribution amount is based on a percentage of the employee's taxable wages, with contributions made by both the employee and/or employer.
-
Local Earned Income Tax (EIT)
Local Earned Income Tax (EIT) is a rate-based tax imposed by local governments, (e.g. cities, townships, or counties), on an employee’s taxable wages. It is an employee-paid tax that is withheld by the employer and remitted to the appropriate local agency on the employee's behalf. Local EIT rates vary depending on the employee’s work location and residence location.
Employers are responsible for registering with each applicable state agency where taxes must be remitted. Depending on the state, this may include registration for:
-
State Unemployment Insurance (SUI)
-
State Income Tax (SIT) withholding
-
Paid Family Medical Leave (PFML)
-
Local Earned Income Tax (EIT)
All account numbers issued by the state agencies must be entered into the employer's payroll account to ensure accurate tax calculations and timely filing of tax returns.