Do Employers Pay State Income Tax for Employees?
Clarify an employer's role in state income tax. See the distinction between taxes withheld from employee wages and those paid directly by the business.
Employers do not pay state income tax on behalf of their employees. Instead, they are legally required to deduct, or withhold, this tax from an employee’s wages. This tax is the personal liability of the employee, and the employer’s function is to collect it and pass it to the state government. This process ensures that employees pay their income taxes gradually throughout the year.
The Employer’s Role in State Income Tax Withholding
An employer acts as a withholding agent for the state’s revenue agency, collecting the employee’s personal state income tax (SIT) from their paycheck. The money withheld is considered a “trust fund tax,” meaning the funds never legally belong to the employer and are held in trust for the government. State tax agencies have penalties to ensure the remittance of these taxes, similar to the federal Trust Fund Recovery Penalty.
The amount of SIT to withhold is determined by information the employee provides. When hired, an employee completes a federal Form W-4 and often a corresponding state-specific withholding form. These documents detail the employee’s filing status, dependents, and any additional withholding requests, allowing the employer to calculate the correct tax amount.
State Taxes Employers Directly Pay
While employers withhold employee income tax, they are directly responsible for other payroll taxes, primarily the State Unemployment Tax Act (SUTA) tax. This is typically an employer-paid expense, but a few states, including Alaska, New Jersey, and Pennsylvania, also require employee contributions. SUTA tax funds state unemployment insurance programs and is paid by the employer on wages up to an annual limit, or wage base.
Each state sets its own SUTA wage base and tax rates, and an employer’s rate can be experience-rated, changing based on former employees filing for unemployment. Employers also pay a federal unemployment tax (FUTA), calculated on the first $7,000 of each employee’s annual wages. The standard FUTA rate is 6.0%, but employers who pay state unemployment taxes on time can receive a credit up to 5.4%, lowering the federal rate to 0.6%.
The Withholding and Remittance Process
After withholding the correct amount of state income tax, the employer must remit these funds to the proper state tax agency. States establish deposit schedules that dictate how frequently payments must be made, which can be quarterly, monthly, or semi-weekly. These schedules depend on the total amount of tax withheld, with larger employers often required to make deposits more frequently.
Employers also file periodic reconciliation reports, often quarterly, summarizing total wages paid and state income taxes withheld. At the end of the year, employers must provide each employee with a Form W-2 by January 31, detailing annual earnings and the amount of federal and state income tax withheld. A copy is also sent to the state tax agency, reconciling the year’s deposits.
Considerations for Multi-State and Remote Employees
The rise of remote work has introduced complexities into state tax withholding. An employee’s income is taxed by the state where the work is physically performed. If a company is based in one state but has an employee working remotely from another, the employer is typically required to withhold income tax for the employee’s home state.
The presence of a remote employee can create “nexus,” a connection that subjects the employer to that state’s tax laws. This requires the employer to register with the new state’s tax and labor departments to manage income tax withholding and unemployment tax obligations. To simplify these situations, many states have entered into reciprocity agreements, which allow an employee who lives in one state and works in another to only have income taxes withheld for their state of residence.