What we don’t have to tell you: When your team grows, your payroll tax responsibilities grow with it. And, they get even trickier when your employees live or work in different states.
What we do: If you don’t keep up with shifting payroll tax rates, wage bases, and filing deadlines, you risk costly penalties, frustrated employees, and damage to your reputation.
Let’s say you have a remote employee in California (with state income tax) and she relocates to Texas (a non-income tax state). If your payroll system doesn’t catch changes like this in time, you could over- or under-withhold, leading to angry calls from employees and letters from tax authorities.
This isn’t a paperwork chore you can ignore. Payroll taxes are how you fund Social Security, Medicare, unemployment insurance, and other vital programs while staying on the right side of federal, state, and local laws.
In this article, you’ll get a breakdown of what payroll taxes include, how they vary by state, where employers often slip up, and how you can keep your organization compliant and confident.
Understanding payroll tax fundamentals
You can’t pay your people correctly — or keep your organization safe from fines — without understanding payroll tax basics. Let’s unpack payroll taxes, how they differ from income taxes, and why you can’t risk messing them up.
What is payroll tax?
Payroll tax covers the mandatory taxes you withhold from employees’ paychecks, plus the taxes you pay as an employer. These taxes fund essential programs like Social Security and Medicare (part of the Federal Insurance Contributions Act, or FICA) as well as state and federal unemployment benefits.
Here’s what’s typically included in payroll taxes:
- Employee-paid taxes – Taxes you deduct from your team’s wages: their share of FICA, state income taxes (if applicable), and sometimes local income taxes.
- Employer-paid taxes – Taxes you owe directly on employee wages: your share of FICA, Federal Unemployment Tax (FUTA), and State Unemployment Tax (SUTA).
So when you come across keywords or questions like “what is payroll tax,” “what are payroll taxes,” or “what is in payroll tax,” know they all include both what you withhold and what you pay as an employer.
Payroll tax vs. income tax
Payroll taxes and income taxes might sound similar, but they work differently in your payroll management strategy:
- Payroll taxes are based on employee wages and fund programs like Social Security and unemployment insurance. You remit them every pay cycle.
- Income taxes are based on total income and go directly to federal or state governments, either through withholdings or annual filings.
Not to sound like a legal disclaimer page (TCP is not a substitute for legal advice), but mixing these up leads to under- or over-withholding, late payments, and unnecessary penalties.
Why payroll taxes matter for employers
Payroll taxes aren’t optional. Read that part again.
They fund critical programs your employees depend on and are the law of the land for every U.S. employer. If you miss payments or file incorrectly, you face:
- IRS penalties – Fines start at 2% of unpaid amounts and rise to 15% for severe delays. Repeated errors can trigger IRS or state audits.
- Personal liability – Owners and managers can be held personally responsible for unpaid payroll taxes.
- Reputation damage – Employees who don’t get their correct pay lose trust quickly, which can tank morale and retention.
Transparent processes and reliable systems aren’t just fancy buzzwords in the payroll space — you need them to pay on time, every time.
How do payroll taxes vary by state?
Federal payroll taxes stay the same nationwide, but state and local payroll taxes differ widely.
Some states, like California, require you to withhold State Disability Insurance (SDI). States like New York have extra taxes, such as the Metropolitan Commuter Transportation Mobility Tax (MCTMT).
Meanwhile, some states like Texas and Florida don’t levy state income tax at all, but you still owe FUTA and SUTA.
If you have employees in multiple states, you must follow each state’s rules on rates, wage bases, and reporting deadlines. Keep reading as we explore each state’s laws in depth.
Types of payroll taxes employers must know
You can’t manage what you don’t understand, and payroll taxes are no exception. Knowing the taxes you’re responsible for as an employer helps you avoid mistakes that cost time, money, and employee trust.
Employee vs. employer payroll taxes
Your payroll process needs to account for two sides of payroll taxes:
- Employee payroll taxes – The deductions you make from employees’ paychecks, like their share of FICA taxes (Social Security and Medicare), state income taxes, and some local income taxes.
- Employer payroll taxes – The taxes your company must pay on top of gross wages, including your share of FICA, Federal Unemployment Tax (FUTA), and State Unemployment Tax (SUTA).
A simple mistake like paying only the employee’s share of FICA can put you in immediate non-compliance.
Here’s a quick comparison:
| Tax type | Employee pays | Employer pays |
| Social Security | 6.2% | 6.2% |
| Medicare | 1.45% | 1.45% |
| FUTA | – | 0.6% (on first $7,000 wages) |
| SUTA | – | Varies by state |
| State income taxes | Varies | – |
| Local taxes | Varies | Sometimes |
Breakdown of common payroll taxes
To run a compliant payroll management, you need to understand these core taxes:
- Federal Insurance Contributions Act (FICA) – This tax covers Social Security and Medicare funding. Employees and employers each pay half: 6.2% for Social Security up to the annual wage base, and 1.45% for Medicare with no income limit.
- Federal Unemployment Tax Act (FUTA) – Employers pay this tax to fund federal unemployment benefits. The standard FUTA tax rate is 6% on the first $7,000 of wages per employee, but after Form 940 credits, the effective rate is typically 0.6%.
- State Unemployment Tax Act (SUTA) – Employers must pay state unemployment taxes on employee wages. Rates and wage bases vary by state, often shifting yearly. Details can be found on each state’s workforce agency site.
- State and local income taxes – Depending on where your employees work, you may need to withhold state or local income taxes for some team members but not others.
Understanding these payroll taxes and the difference between what employees pay versus what employers owe is the foundation of reliable, compliant payroll.
Payroll taxes by state: Why location matters
Each state has its own rules on income tax, unemployment insurance, and sometimes unique payroll-related taxes, all which determine what you must withhold and pay in your payroll process.
A one-size-fits-all payroll approach won’t cut it if you pay employees in more than one state. You need systems that adapt to each jurisdiction’s requirements so you don’t accidentally under- or overpay taxes. Failing to apply the correct state tax rates is one of the most common — and costly — mistakes multi-state employers make.
If your team includes employees across state lines, you need to:
- Track every state’s rules – Know each location’s wage bases, tax rates, and filing requirements.
- Update tax tables proactively – States often change unemployment rates and income tax brackets at the start of the calendar year.
- Handle remote and hybrid work correctly – Even temporary relocations can trigger new state payroll tax obligations, requiring you to register with a new state agency. With the growth of remote work, knowing where your employees live (and work) is even more important.
- Check local taxes – Some cities and counties have their own taxes on top of state rules, like Denver’s Occupational Privilege Tax or San Francisco’s Payroll Expense Tax.
Navigating payroll tax laws by state might sound complicated, but we’ve broken it down for you.
Here’s a quick-reference payroll tax snapshot per state (for the most up-to-date information and more details, refer to the U.S. Department of Labor’s Unemployment Insurance Tax Information — the primary source for SUTA rate ranges, wage bases, and employer responsibilities in each state):
| State | State Income Tax | Unique Payroll Taxes | Approx. SUTA Rate Range |
| Alabama | Yes | None | 0.20–5.40% |
| Alaska | No | None | 1.00–5.40% |
| Arizona | Yes | None | 0.04–9.72% |
| Arkansas | Yes | None | 0.10–10.20% |
| California | Yes | SDI | 1.50–6.20% |
| Colorado | Yes | None | 0.81–12.30% |
| Connecticut | Yes | None | 1.10–8.90% |
| Delaware | Yes | None | 0.60–5.60% |
| Florida | No | Reemployment Tax | 0.10–5.40% |
| Georgia | Yes | None | 0.04–8.10% |
| Hawaii | Yes | None | 0.00–5.60% |
| Idaho | Yes | None | 0.225–5.40% |
| Illinois | Yes | Chicago local taxes | 0.75–7.85% |
| Indiana | Yes | County income taxes (varies) | 0.50–7.40% |
| Iowa | Yes | None | 0.00–7.00% |
| Kansas | Yes | None | 0.00–6.40% |
| Kentucky | Yes | None | 0.30–9.00% |
| Louisiana | Yes | None | 0.09–6.20% |
| Maine | Yes | None | 0.30–6.27% |
| Maryland | Yes | County taxes | 0.30–7.50% |
| Massachusetts | Yes | None | 1.04–15.85% |
| Michigan | Yes | None | 0.06–10.30% |
| Minnesota | Yes | None | 0.10–8.90% |
| Mississippi | Yes | None | 0.20–5.40% |
| Missouri | Yes | None | 0.00–5.40% |
| Montana | Yes | None | 0.00–6.12% |
| Nebraska | Yes | None | 0.00–5.40% |
| Nevada | No | None | 0.30–5.40% |
| New Hampshire | Yes* | Interest & Dividends Tax only | 0.10–7.50% |
| New Jersey | Yes | Disability & Family Leave Ins. | 0.60–6.40% |
| New Mexico | Yes | None | 0.33–6.40% |
| New York | Yes | MCTMT in NYC area | 2.10–9.90% |
| North Carolina | Yes | None | 0.06–5.76% |
| North Dakota | Yes | None | 0.08–9.69% |
| Ohio | Yes | City income taxes (many cities) | 0.50–10.20% |
| Oklahoma | Yes | None | 0.30–9.20% |
| Oregon | Yes | Transit taxes in some areas | 0.90–5.40% |
| Pennsylvania | Yes | Local income taxes (varies) | 1.419–10.734% |
| Rhode Island | Yes | None | 1.10–9.70% |
| South Carolina | Yes | None | 0.06–5.46% |
| South Dakota | No | None | 0.00–9.30% |
| Tennessee | No | None | 0.01–10.00% |
| Texas | No | None | 0.31–6.31% |
| Utah | Yes | None | 0.20–7.10% |
| Vermont | Yes | None | 0.40–5.40% |
| Virginia | Yes | None | 0.11–6.21% |
| Washington | No | Paid Family & Medical Leave | 0.13–5.70% |
| West Virginia | Yes | None | 1.50–8.50% |
| Wisconsin | Yes | None | 0.00–12.00% |
| Wyoming | No | None | 0.00–9.78% |
Compliance challenges with payroll taxes
Even when you know which payroll taxes to pay, challenges go far beyond awareness — keeping up with changing laws, employee details, and reporting requirements are common hurdles that trip up organizations and can lead to costly mistakes.
Frequent tax rate changes
Federal, state, and local governments regularly update tax rates, wage bases, and thresholds.
For example, many states adjust their annual SUTA rates based on your experience rating, basically a score that states assign to each employer based on a company’s history with unemployment claims. It reflects how often your former employees have collected unemployment benefits.
- If your company has few or no layoffs, you’ll likely get a low experience rating — and therefore a lower SUTA tax rate.
- If your company has frequent layoffs or high turnover, your experience rating worsens — which can mean a higher SUTA tax rate.
If your systems or processes don’t stay current, you might withhold the wrong amounts or pay incorrect employer taxes, both of which can cause fines, audits, and frustration for your team.
Employee classification issues
Misclassifying workers is one of the most common payroll mistakes. Treating an employee as an independent contractor or incorrectly marking someone as exempt from overtime affects how you withhold taxes and whether you pay payroll taxes on their wages.
The IRS and Department of Labor take classification errors seriously. They can result in — as you can probably guess with other payroll issues — back taxes, unpaid benefits, and fines.
Recordkeeping and reporting errors
The last thing you need is more scrutiny of your business. But incomplete or inconsistent data on time worked, wages paid, or deductions taken leads to mistakes in quarterly and annual tax filings, AKA red flags to the IRS.
Late or incorrect filings with federal and state workforce agencies, or local tax authorities, may result in extra intervention and (of course) monetary penalties. Reliable recordkeeping systems are your best defense against compliance errors.
How connecting employee scheduling and time & attendance systems support payroll tax compliance
Manually tracking hours, calculating wages, and updating tax rates leaves too much room for error. Integrating scheduling, timekeeping, and payroll systems reduces mistakes and ensures you apply the right payroll taxes every time.
Integrating scheduling with payroll
When your employee scheduling and time tracking systems connect directly to payroll, you don’t have to re-enter hours or apply rates by hand manually. When time worked flows automatically into payroll calculations, you ensure payroll accuracy without the extra admin work.
Accurate time tracking for wage calculations
Precise time tracking helps you pay overtime correctly, account for shift differentials, and comply with state wage-hour laws. Without accurate records you risk underpaying or overpaying employees, mistakes that lead directly to payroll tax issues.
Automated tax withholding updates
Why keep up with federal, state, or local rate changes when a payroll system can automatically update your tax tables for you? Integrations help you apply the correct tax rates for each employee’s location, sans the without manual research or data entry.
Reducing human error with automation
Say one of your employees moves from Florida to Illinois. Along with the immediate change in weather comes different withholdings — integrated systems update the employee’s records without missed updates, fines, or headaches.
Best practices for managing payroll taxes efficiently
You don’t have to be a tax expert to keep your payroll taxes accurate. These best practices can help you stay confident in your payroll management process and compliance with all the laws.
Keep up-to-date with tax tables and notices
Subscribe to IRS, state, and local agency newsletters or updates so you’re notified of changes to tax rates, wage bases, and filing deadlines. Then double-check your payroll system to ensure the changes are reflected.
Use reliable payroll software
Look for payroll solutions that:
- Automatically calculate and apply federal, state, and local tax rates
- Support multi-state payroll
- Provide compliance reporting and alerts
Leverage HR & finance integration
If you want to ensure consistent data across your entire organization, it requires HR, scheduling, timekeeping, and payroll systems working together. Integrated systems reduce data entry errors and make keeping your payroll tax records accurate easier.
Regularly audit payroll records
Periodic self-audits or third-party reviews help catch discrepancies before they become bigger problems. A simple quarterly check can identify tax rates, classification, or recordkeeping issues.
Know your limits
Even with best practices in place, payroll tax compliance can outgrow your internal resources, especially if you hire across state lines or face repeated tax notices. When complexity exceeds your team’s capacity, don’t wait for problems to escalate.
Partnering with a payroll expert or trusted advisor helps you navigate multi-state tax rules, stay compliant, and avoid costly mistakes. Trying to manage it all by yourself not only eats up operational hours and skill leverage, but increases the stress and friction for your teams.
Recognizing when it’s time to bring in outside help protects your business and keeps your payroll processes running smoothly.
Stay ahead of payroll taxes and protect your organization
Think back to your employee who moved from California to Texas.
Without the right payroll tax system, your team might:
- Forget to stop California SDI deductions
- Update the employee SUTA rates
- Risk overpayment on taxes
- Create compliance gaps
- Frustrate your worker
A modern payroll tax solution adjusts everything automatically, cutting the guesswork from the process.
TL;DR – Payroll taxes don’t have to be a source of constant stress when you have the right system.
Know your obligations. Keep your systems current. Automate what you can in your workflows. These will all help you make sure you pay employees accurately and protect your business from costly penalties.
Don’t let payroll tax complexity hold your organization back. Take proactive steps today to build a payroll process you and your team can trust.
TCP Software’s employee scheduling and time and attendance solutions have the flexibility and scalability to suit your business and your employees, now and as you grow.
From TimeClock Plus, which automates even the most complex payroll calculations and leave management requests, to Humanity Schedule for dynamic employee scheduling that saves you time and money, we have everything you need to meet your organization’s needs, no matter how unique. Plus, with Aladtec, we offer 24/7 public safety scheduling solutions for your hometown heroes.
Ready to learn how TCP Software takes the pain out of employee scheduling and time tracking? Speak with an expert today.
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