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Payroll Tax

Definition of Payroll Tax

Payroll tax in the United States refers to the tax that employers must withhold from the wages of the employees. Payroll tax is also known as withholding tax, pay-as-you-go tax (PAYG) or pay-as-you-earn tax (PAYE). Payroll tax is an advance payment by the employees of their income taxes and social security contributions. Payroll tax is a fixed charge that is proportionally linked to the employee’s pay.

Payroll taxes in the United States are assessed by the federal government and by the government of all the states. Payroll taxes may also include assessments by cities and other local jurisdictions. Payroll taxes are generally reported quarterly and annually.

Income taxes are to be withheld by employers for federal, state, and local governments in jurisdictions that impose income taxes. The income taxes are to be deducted from the wages of the employees working in those jurisdictions. The computation of the amount of income tax to withhold will be done by the employer based on what the employee will submit as to his tax status on IRS Form W-4. The amount of income tax withheld will be paid by the employer to the taxing jurisdiction, namely the federal, state, or any local jurisdiction and will be available to the employee as refundable tax credit. It must be noted that the income taxes withheld from the payroll are not considered as final taxes but merely prepayments. The employee from whom the income tax had been withheld must still file his income tax returns and assess the tax to be paid, and claim the amounts withheld from the payroll as his tax payment.

Employers must also withhold from employees’ wages, as part of the payroll tax, federal social insurance taxes that are imposed equally on both employers and employees. Social Security tax shall be 6.2% of wages up to an annual wage maximum of $106,800 in 2010 and Medicare tax shall be 1.45% of all wages. A special legislation had been passed by the U.S. Congress to temporarily reduce employee’s contribution for the years 2011 and 2012 to 4.2% but the employer’s portion shall remain at 6.2%. In the event that an employee’s contribution exceeded 6.2% because of multiple employment, he will be entitled to a refundable credit when he files his income tax for the year the excess deductions had been made.

Another item that is included in the payroll tax, or the amount to be withheld from the employee’s wages is the unemployment tax. While the unemployment tax generally covers only employers, there are some states or jurisdiction that subject employees to taxes on unemployment and disability insurance. In those instances when employees are required to pay those taxes, those taxes are to be withheld from their wages and must be remitted by the employers to the jurisdiction as part of the payroll tax withheld.

Payroll Tax by State

Alabama

Alabama imposes a state tax on personal income. Employers therefore are required by law to withhold payroll taxes from anybody who works in Alabama, regardless of which state the employee lives in. A non-Alabama resident who works in Alabama is subject to income tax withholding deductions from his wages.

Some types of employees are exempt from Alabama withholding tax. Those exempted from Alabama withholding tax include merchant seamen, agricultural and domestic employees, and duly ordained ministers.

Alabama imposes a penalty for late filing of Alabama withholding tax return in the form of 10% of the tax due or $50.00, whichever is greater. Late payment of withholding tax is subject to a penalty of 10% of the payroll taxes due. In the event of late filing of returns and late payment of tax due, the two penalties will be added together, plus interest which is computed at the rate applicable to federal tax deficiencies.

Payroll taxes must be filed and paid to:

Alabama Department of Revenue
Individual & Corporate Tax Division
Withholding Tax Section
Gordon Persons Building, Room 4326
50 North Ripley St.
Montgomery, AL 36104
www.revenue.alabama.gov

Alaska

The State of Alaska does not impose individual income tax. Employers are not required to withhold taxes from employees working in the state.

Arizona

Arizona employers must withhold Arizona income tax from employees who are paid wages for services performed within the state. The income tax to be withheld is equivalent to a percentage of the employee’s gross taxable wages. Employees may also request their employers to withhold an additional amount. Employees must complete Arizona Form A-4, the Employee’s Arizona Withholding Percentage Election, to choose an Arizona withholding percentage.

Wages that are subject to mandatory federal withholding are also subject to mandatory Arizona withholding. Amounts that are excluded from wages and are excluded from mandatory federal withholding are excluded from mandatory Arizona withholding.

Arkansas

Arkansas employers are required by law to register as employer by filing for an ADWS Employer Account Number. Arkansas employees are subject to withholding tax for wages earned within the state. Employees may be exempted from withholding taxes by getting an Employee’s Withholding Exemption Certificate – AR4EC.

Arkansas employers are required by law to report quarterly wages and Arkansas State Tax Unemployment Insurance (SUI) by filing Employer’s Quarterly Contribution and Wage Report by the last day of the month following end of a quarter.

California

The State of California has four payroll taxes that are administered by the Employment Development Department (EDD). These taxes are the Unemployment Insurance (UI) and Employment Training Tax (ETT), which are both employer contributions, and the State Disability Insurance (SDI) and Personal Income Tax (PIT) which are withheld from the wages of employees.

Employers are required, beginning the first quarter of 2011, to file quarterly returns, using the following forms:

  • Quarterly Contribution Return and Report of Wages (DE 9)
  • Quarterly Contribution Return and Report of Wages (Continuation (DE 9C)

Colorado

Colorado employers are required by law to register as employer by filing Form CR 100 (Business Registration). Colorado employees are subject to withholding tax for wages earned within the state. Employees must fill up Employee Withholding Allowance Certificate (Federal W-4) which will be the basis of the amount of taxes to be withheld.

Colorado employers must report quarterly wages and contributions by filing Form UITR-1(a) (Unemployment Insurance Report of Worker Wages) and Form UITR – 1 (Unemployment Insurance Tax Report) by the end of the month following the end of quarter.

Connecticut

Connecticut employers are required by law to register as employer by filing Form UC – 1A (Employer Status Report. Connecticut employees are subject to withholding tax for wages earned within the state. Employees must fill up Employee Withholding Allowance Certificate (CT W-4) which will be the basis of the amount of taxes to be withheld.

Connecticut employers must report quarterly wages and contributions by filing Form UC – 5A (Employee Quarterly Earnings Report) and Form UC – 2 (Employer Contribution Return) on the last day of the month following end of quarter.

Employees’ CT W-4 forms must be submitted by the employers to:
Department of Labor
Office of Research
200 Folly Brook Boulevard
Wethersfield, CT 06109
860-424-5044
800-816-1108 fax (in state only)

Delaware

Delaware employers are required by law to register as employer by filing Form CRA (Combined Registration Application for Business License and/or Withholding Agent). Delaware employees are subject to withholding tax for wages earned within the state. Employees must fill up Employee Withholding Allowance Certificate (Federal W-4) which will be the basis of the amount of taxes to be withheld.

Delaware employers must report quarterly wages and contributions by filing Form UC – 5A (Employee Quarterly Earnings Report) and Form UC – 2 (Employer Contribution Return) on the last day of the month following end of quarter.

Delaware employers must also register by Filing Form UC – 1 (Report to Determine Liability and If Liable Application for Employer Account Number).

Florida

There is no personal income withholding tax in the State of Florida but employers still need to register as employer by filing Form DR-1 (Application to Collect and/or Report Tax in Florida). Employers are required to report quarterly wages and contributions by filing Form UCT – 6 (Employer’s Quarterly Tax Report) by the end of the month following end of a quarter.

Georgia

Employers in Georgia are required to register by filing Form DOL – 1A (Employer Status Report). Georgia employees are subject to withholding tax for wages earned within the state of Georgia. Employees must fill up Employee’s Withholding Allowance Certificate (G4) which will determine the amount of taxes to be withheld by the employer.

Hawaii

Hawaii employers must register as an employer by filing Hawaii Form GEW-TA-RV-3. All wage earners in the State of Hawaii are subject to withholding tax for wages earned within the state. The amount of taxes to be withheld from the employees shall be based on their exemptions as provided for in the Employee’s Withholding Allowance and Status Certificate (HW-4) that they need to submit to through their employers.

Idaho

Idaho employers must register by filing Form IBR – 1 (Business Registration Form). All employees in the state are subject to withholding deductions from wages earned within Idaho. The amount of taxes employers must withhold from the wages of employees shall be based on their exemption as stated in the Withholding Allowance Certificate (Federal W-4) which must be submitted to the employer.

Idaho employers are required to report quarterly wages and contributions by filing Form TAX026 (Unemployment Insurance Wage Report) and Form TAX020 (Employer Quarterly Unemployment Insurance Tax Report) which must be submitted at the end of the month following the end of the quarter.

Illinois

Illinois employers are required by law to collect withholding taxes from wages of employees in the state. Employers must withhold taxes from employee compensation paid in Illinois, gambling or lottery winnings in Illinois paid to an Illinois resident, or unemployment paid to an Illinois resident who has requested to have his Illinois tax withheld.

Indiana

In order to be authorized to withhold taxes from wages earned within the state of Indiana, employers must first register by filing Form BT-1 (Business Tax Application). The amount of tax to be withheld from wages earned in Indiana shall be based on the employee’s exemption as provided for in the Employee’s Withholding Exemption and County Status Certificate (WH-4)

Iowa

To be eligible to withhold income taxes from wages earned within the state, employers must register as employer by filing Form 60-0126 (Report to Determine Liability. The amount of income tax to be withheld from employee’s wages shall be based on the employee’s exemption as stated in the Employee Withholding Allowance Certificate (IA-W4).

Kansas

Employers in Kansas can be authorized to collect withholding tax from employee’s wages only after registering as employer which can be done by filing Form K-CNS 010 (Status Report to Determine Unemployment Insurance Liability). The amount of tax that can be withheld from employee’s wages shall be based on the employee’s exemption as stated in his Employee’s Withholding Allowance Certificate (K-4).

Kentucky

In order to be authorized to withhold taxes from wages earned within the state of Kentucky, employers must first register by filing Form UI-1 (Application for Unemployment Insurance Employer Reserve Account). The amount of tax to be withheld from wages earned in Indiana shall be based on the employee’s exemption as provided for in the Employee’s Withholding Allowance Certificate (Form K-4)

Louisiana

Louisiana employer with resident or nonresident employees who perform services within the state must withhold Louisiana income tax which shall be based on the employee’s withholding exemption certificate. Louisiana residents who work in other states are subject to Louisiana’s withholding tax if the wages are not subject to withholding of net income tax in the state the services were performed.

Maine

Employers in Maine can be authorized to collect withholding tax from employee’s wages only after registering as employer. The amount of tax that can be withheld from employee’s wages shall be based on the employee’s exemption as stated in his Employee’s Maine Withholding Allowance Certificate (Form W-4ME).

Maryland

In order to be authorized to withhold taxes from wages earned within the state of Maryland, employers must first request for withholding identification number by filing Form COT/ST 705 (Combined Registration Application). The amount of tax to be withheld from wages earned in Maryland shall be based on the employee’s exemption as provided for in the Employee’s Maryland Withholding Allowance Certificate (Form MW 507)

Massachusetts

Massachusetts employers can withhold taxes from employee’s wages only after registering as employer which can be done requesting for an identification number only by using Webfile for Business. The amount of tax to be withheld from employee’s wages shall be based on the employee’s exemption as stated in his Employee Withholding Allowance Certificate (M-4).

Michigan

Michigan employers can be authorized to withhold employees’ taxes by first registering online as an employer. Michigan employees’ wages are subject to withholding tax based on the Michigan Withholding Exemption Certificate (MI-W4) they submitted to their employers. Several cities in Michigan have their own withholding forms.

Minnesota

Minnesota employers must first register by filing Form MDES-13 (Report to Determine Liability) before they could withhold taxes from wages earned in the state. The amount of taxes to be withheld from employees’ wages shall be based on the exemptions the employees stated in the Employee Withholding (Form W-4MN). Employers are also required to report quarterly wages and contributions by filing Form MDES-1D(Employer’s Unemployment Quarterly Tax Report) by the end of the month following the end of a quarter.

Mississippi

Employers in the State of Mississippi must register for federal employer identification number for state withholding by filing Form 70-001 (Registration Application). Taxes withheld from employees’ wages shall be based on the exemptions the employees stated in their Mississippi Employee’s Withholding Exemption Certificate (Form 89-350).

Missouri

Missouri employers must register online in order to be authorized to withhold taxes from wages earned within the state. The amount of tax employers could withhold from employee wages shall be based on the exemptions the employee stated in the Employee’s Withholding Allowance Certificate (Form MO W-4).

Montana

Employers in the State of Montana must register as employer by filing Form UI/R-1 (Employer Registration before they are authorized to withhold taxes from wages earned within the state. The tax to be withheld from employee wages shall be determined by the exemptions stated in the Employee’s Withholding Allowance Certificate (Federal W-4).

Nebraska

Nebraska employers can withhold taxes from wages earned within the state by first requesting for an identification number by filing.

Form 20 (Tax Application). The Employee’s Withholding Exemption Certificate (Federal W-4) shall be the basis of the amount of tax to be deducted from the employee’s wages.

Nevada

There are no withholding taxes in the State of Nevada.

New Hampshire

There are no withholding taxes in the State of New Hampshire.

New Jersey

Employers in New Jersey can start withholding taxes from wages earned within New Jersey only after they register as employer by filing Form NJ-REG. The amount of tax to be withheld from the employee wages shall be based on the employee’s exemptions as stated in the Employee’s Withholding Allowance Certificate (Form NJ W-4).

New Mexico

Employers in the State of New Mexico must withhold a portion of employee’s wages for payment of income tax. The amount to be withheld is the estimate of the employee’s income tax liability. It varies depending on how many allowances a New Mexico employee can claim on the Federal W-4 and how often his wages are paid. Employers must refer to the New Mexico State Wage Withholding Tables.

New York

New York employers are required to withhold portion of employee’s wages earned within the state after they register as employer by filing Form IA 100 (Report to Determine Liability). The amount of tax to be withheld from employee’s wages varies depending on the exemptions the employee is claiming in his Employee’s Withholding Allowance Certificate (Form IT-2104). Taxes withheld by employers must be remitted to:

Department of Taxation and Finance

Income Tax Bureau

Withholding Tax Unit

Albany, NY 12227

North Carolina

Employers in North Carolina are required to withhold income tax from employee’s wages earned within the state after registering as employer by filing form NCUI 604 (Employer Status Report). The amount of tax to be withheld from employee’s wages varies depending on the exemptions of the employee as stated in his Employee’s Withholding Allowance Certificate (Form NC-4).

North Dakota

North Dakota employers are required to withhold a portion of the employee’s wages earned within the state for payment of income tax. Employers must first register as employer by filing Application for Income Tax Withholding and Sales and Use Tax Permit before they could withhold a portion of the employee’s wages. The amount to be withheld varies according to the employee’s claims in his Employee Withholding Allowance Certificate (Federal W-4).

Ohio

Ohio employers are required to withhold a portion of employee’s wages earned within the state. Before employers can withhold taxes, they must first register as employer by filing form UCO-1. The amount to be withheld from employee’s wages shall depend on the exemptions the employee is claiming in his Employee’s Withholding Exemption Certificate (Form IT-4).

Oklahoma

Employers in the State of Oklahoma must register as employer by filing Form OES-1 before they can withhold a portion of the employee’s wages as payment of income tax. The amount to be withheld from the employee’s wages shall be based on the employee’s claim for exemption as stated in the Employee’s Withholding Allowance Certificate (Federal W-4).

Pennsylvania

Pennsylvania employers are required to withhold portion of the employee’s wages as part of the employee’s income tax payment after registering for a federal employer identification number for state withholding by filing Form PA-100 (Combined Registration Form). The amount to be withheld shall be based on the employee’s Local Earned Income Tax Residency Certification Form (DCED-CLGS-06).

Rhode Island

Rhode Island employers must register as employer by filing Form BAR (Business Application Registration) before they can start withholding a portion of the employee’s wages as payment of income tax. The amount to be withheld shall be determined by the employee’s exemptions claimed in the Employee Withholding Allowance Certificate (RI-W4).

South Carolina

South Carolina employers are required to withhold a portion of the employee’s wages as part of his income tax payment. Before an employer can withhold employee’s income tax payments, the employer must first register by filling our Form SCTC-1111. The amount to be withheld shall be based on the employee’s exemption claims as stated in his Employee’s Withholding Allowance Certificate (Federal W-4).

South Dakota

There is no withholding tax in South Dakota.

Tennessee

There is no withholding tax in Tennessee.

Texas

There is no withholding tax in Texas.

Utah

Employers in the State of Utah are required to withhold a portion of employee’s wages as part of the employee’s payment of his income tax. Before employers can withhold portion of employee’s wages, they must first register by filing Form 1 (Status Report). The amount to be withheld from employee’s wages varies depending on the employee’s exemption claims as provided for in his Employee’s Withholding Allowance Certificate (Federal W-4).

Vermont

Vermont employers must withhold a portion of the employee’s wages as payment for income tax. Employers have the option of remitting withholding taxes through Electronic Funds transfer through the use of the ACH Credit payment option. Employers must complete FormEFT-1 to register for the Electronic Funds Transfer programs.

Virginia

Employers in the State of Virginia are required to withhold a portion of employee’s wages as part of the employee’s payment of his income tax. Before employers can withhold portion of employee’s wages, they must first register by filing Form R- 1. The amount to be withheld from employee’s wages varies depending on the employee’s exemption claims as provided for in his Employee’s Income Tax Withholding Exemption Certificate (Form VA-4).

Washington

There is no withholding tax in Washington State.

West Virginia

Employers in the State of West Virginia are required to withhold a portion of employee’s wages as part of the employee’s payment of his income tax. Before employers can withhold portion of employee’s wages, they must first request for Employer West Virginia Income Tax Identification Number by filing Form WV/BRT-801. The amount to be withheld from employee’s wages varies depending on the employee’s exemption claims as provided for in his Employee’s Withholding Exemption Certificate (WV/IT-104).

Wisconsin

Employers in the State of Wisconsin are required to withhold a portion of employee’s wages as part of the employee’s payment of his income tax. Before employers can withhold portion of employee’s wages, they must first as employer online. The amount to be withheld from employee’s wages varies depending on the employee’s exemption claims as provided for in his Wisconsin Withholding Exemption Certificate/New Hire Reporting (Form WT-4).

Wyoming

There is no withholding tax in the State of Wyoming.

Payroll Tax Computation

The computation of the payroll tax must be done accurately by employers because the Internal Revenue Service is always firm when it comes to payment of taxes. A slight mistake on the computation of taxes and the amount to be remitted could easily jeopardize the operation of any company as the IRS could impose sanctions and penalties.

The computation of the payroll tax is based on the tax status of each employee as stated in the IRS Form W-4 he submitted. This form will show the amount of federal and state income tax that must be deducted from the employee’s wages because the amount of tax will vary if the employee’s status is married, divorced, or single, or if he has dependents. Most companies or payroll services adopt payroll systems that are in accordance with the federal policy implemented by the IRS.

The social security tax to be withheld from the wages of the employees shall comprise 6.2% of the annual salary. The employer must be listed as a form of contribution. The wage base is $76,000 a year with the amount in excess of that is not to be deducted as taxes from the employment salary. The Federal Unemployment Taxes (FUTA) is to be computed at 6.2% but the employer can credit up to 5.4%. The wage base is limited to $7,000. If the deductions have gone over this amount in less than a year, the deduction for FUTA taxes must stop. The same rules apply to State Unemployment Taxes.

It must be noted that the amount of the payroll deductions are based on the amount of money an employee makes, which is affected by the number of exemptions stated in his W-4 form.

A company will be held accountable for any error in the computations and deductions made on the employees’ wages. All companies are required to maintain a payroll account for the deductions to be transmitted and disbursed to the federal and state governments at the end of the calendar year. Any company that will be found guilty of tax evading practices by the federal or state government will be issued a Trust Fund Recovered Penalty. The penalty is 10% of the taxes plus interest over the unpaid time span covered.

When to File Payroll Tax

Employers are required to report payroll taxes to the respective taxing jurisdiction such as federal government and state government in a manner each government entity provides. Most jurisdictions require a quarterly reporting to the aggregate income tax withholdings and Social Security taxes. In addition to the quarterly reports, employers are also required to file aggregate unemployment tax quarterly and annually with the state that has jurisdiction, and annually at the Federal level. Employers are also required to provide employees copies of an annual report on IRS Form W-2 of wages paid and Federal, state and local taxes withheld, with a copy provided to the IRS and to the state. These copies are due by January 31 and February 28 if filed manually and March 31 if filed electronically.

Employers are required to pay payroll taxes to the taxing jurisdiction within 1 banking day. Most payments of Federal and state payroll taxes are to be made by electronic fund transfer at a certain dollar thresholds.

Where to File Payroll Tax

Payroll taxes withheld from employees’ wages are to be filed and paid to the employer’s taxing jurisdiction, both Federal and state, within the time frame each jurisdiction requires. Every state has its own rules on when and where to file payroll taxes collected from employee’s wages.

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