Unless your business location is in a state which has no state income tax, you have a responsibility as an employer to deduct income taxes from employees who work in your state and to submit these taxes to your state department of revenue. The states with no state income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
These responsibilities are the same as employer responsibilities for payroll taxes, including federal income taxes.
State Income Tax Process
If you have employees working in a state which requires state income tax, here is the process you must follow:
- Obtain a federal Employer ID Number, if you haven't already done so. The EIN is similar to a social security number for a business. It is required for any business with employees and most other businesses.
- Obtain a state employer tax permit which in some states is the equivalent of a state EIN.
- Learn what wages are subject to state income tax withholding (these wages may be different from federal regulations). The information should be on the website of your state's revenue department.
- Learn about any reciprocal agreements between states for income tax withholding and payment for workers who live in one state and work in another.
- Obtain copies of the state withholding tables and calculate state withholding deductions from employee paychecks.
- Learn about your state's regulations for filing (submitting) income tax withholding.
- Deposit withholding amounts deducted from employees (most states use electronic filing for these deductions).
- File reports (annual or quarterly) on amounts withheld and amounts owed and paid (similar to IRS Form 941).
As you can see, the process for calculating, deducting, paying, and reporting on income taxes is similar to the process for federal income tax withholding.
State Tax Agencies
To find out about state income taxes, sales taxes, and other state taxes, go to your state's department of revenue and look for the business tax division.
Julie Garber, Wills and Estate Planning Expert, has a great chart showing all the taxes each state charges, including income taxes, and the agencies to go to for each state.
Withholding State Income Taxes from Employee Paychecks
After you have gathered the information about state income taxes, you will need to include these taxes in your company's payroll process.
The process begins with your calculation of gross pay for each employee.
From that amount, you will need to calculate the specific amount to be withheld for that employee for state income taxes. Remember that each withholding amount (including state income taxes, federal income taxes, and FICA taxes) is calculated against the gross pay amount.
After all taxes and other withholding, you will end up with a net pay amount.
Then, the withholding amounts for each employee and the total for each kind of withholding must be placed in a separate liability account, to be paid as required by your state.