Quick overview
State payroll tax differences determine how much employers pay, what they must withhold from employees, and which reports and deposits are required. These obligations come from state legislatures and agencies (for example, state departments of labor or revenue) and vary widely in rates, taxable wage bases, contribution rules, exemption thresholds, and filing schedules. Employers that ignore state-specific rules risk penalties, interest, and unplanned cash shortfalls.
In my practice advising small and mid-sized employers, I’ve seen two recurring problems: (1) businesses underbudgeting for state-mandated contributions, and (2) failing to register in a state where they have payroll obligations. Both can lead to costly audits and retroactive liabilities.
Sources: U.S. Department of Labor (state UI program guidance) and state workforce agencies provide authoritative rules for unemployment and disability programs (see: DOL state UI guidance).
Why do state payroll taxes differ?
States design payroll taxes to fund different programs (unemployment insurance, state disability insurance, paid family leave, local occupational taxes) and to meet budgetary needs. Differences arise because:
- Each state sets its own taxable wage base and contribution rates for unemployment insurance (often called SUI or SUTA).
- Some states require employer or employee contributions to state disability or paid-family-leave programs (e.g., California, New York, New Jersey); others do not.
- A subset of states impose a mandatory state income tax that employers must withhold; nine states and some localities have no state income tax (e.g., Texas, Florida) while most do.
- Local jurisdictions (cities, counties) may add payroll taxes, commuter levies, or occupational fees that affect employers operating there.
Because rules change (rates and taxable wage bases commonly update annually), employers must check state notices or an employer’s payroll service each year.
Common state payroll taxes and terms
- Unemployment Insurance (SUI/SUTA): Employer-paid (sometimes employee-shared) contributions that fund unemployment benefits. Rates and taxable wage bases vary by state and by employer experience rating. See DOL guidance for program basics.
- State Disability Insurance (SDI): Employer or employee contributions for short-term disability or paid-family-leave programs (not all states have this).
- State Income Tax Withholding: Employers withhold tax from employee wages when the state has an individual income tax. Withholding tables and rules differ by state.
- Local Payroll/Occupational Taxes: Cities or counties may require employer withholding or local business taxes.
- Reemployment/Training or Workforce Surcharges: Some states add small surcharges for workforce programs.
- Wage Base and Experience Rating: The taxable wage base (the ceiling of wages subject to SUI) and an employer’s experience rating (which adjusts the tax rate based on claims history) can dramatically change employer liability year-to-year.
How to determine state payroll obligations
- Establish nexus for payroll: Nexus generally exists where you have employees working in a state, perform services, or maintain a physical presence. Remote employees create nexus in the state where they perform work. (See state workforce or revenue departments.)
- Register with the state employer accounts: Register for SUI, withholding, and any state-specific programs before hiring or soon after hiring employees in a new state.
- Use the employee’s work location to determine withholding and unemployment tax state(s). For multi-state employees, track hours in each state and apply apportionment rules.
- Check annual notices from state agencies on rate changes, taxable wage base updates, and new program levies.
For remote and multi-state workers, pay special attention to the state where the employee performs services. Our guide on remote worker compliance explains practical steps for multi-state payroll tracking (see: Remote Worker Payroll Compliance After Multi-State Work Arrangements).
Internal link: Remote worker payroll compliance: https://finhelp.io/glossary/remote-worker-payroll-compliance-after-multi-state-work-arrangements/
Practical employer checklist (setup and ongoing)
- Before hiring: Confirm state registration requirements and set up employer accounts for SUI and withholding.
- Payroll system configuration: Configure payroll software with state-specific wage bases, rates, and deposit schedules.
- New hires and withholding forms: Collect state withholding forms where applicable (some states use federal Form W-4 or their own forms).
- Deposit cadence: Follow each state’s deposit schedule; some require monthly deposits, others quarterly or semi-weekly depending on payroll size.
- Quarterly and annual filings: File state UI reports, wage reports, and state withholding returns on time.
- Year-end reporting: Prepare and file W-2s with correct state wages and state tax withheld information.
- Monitor experience rating and benefit charges: Review your SUI account to identify chargebacks or benefit costs that affect next-year rates.
Related guidance: Employer deposits, returns and compliance are covered in our article Employer Payroll Compliance: Keeping Deposits and Returns in Line.
Internal link: Employer deposits and returns: https://finhelp.io/glossary/employer-payroll-compliance-keeping-deposits-and-returns-in-line/
Real-world examples and common state contrasts
- California and New York: Both require contributions to state disability or paid-family programs for many employees and have robust unemployment systems. These states typically have multiple employer and employee-paid components and require careful payroll configuration.
- Texas and Florida: No state personal income tax, but employers still pay SUI and must register with state workforce agencies. Absence of state income tax simplifies withholding but not unemployment obligations.
- Local taxes: Cities such as San Francisco or certain county jurisdictions may impose additional employer or employee taxes (commuter taxes, local occupational taxes).
Note: Specific rates and taxable wage bases change annually and vary by employer experience; do not rely on historical numbers in budgeting without checking current state notices.
Common mistakes employers make
- Not registering timely in a state where employees work (creates retroactive liability).
- Applying home-state withholding rather than work-state withholding for remote employees.
- Forgetting local payroll taxes when expanding into metro areas.
- Misconfiguring taxable wage bases or failing to account for employee-paid state contributions (e.g., SDI).
- Not monitoring SUI experience-rating changes after layoffs or large claims.
Practical payroll strategies (professional tips)
- Use payroll software or a reputable payroll provider that automatically updates state rates and wage bases.
- Run a quarterly payroll compliance review—check registrations, deposits, filings, and employee work locations.
- Track multi-state employee hours and maintain documentation of work location, as state audits often focus on where services were performed.
- Consider a payroll tax reserve when expanding into high-cost states to absorb rate increases and experience-rating spikes.
- If audited, produce payroll journals, state wage reports, and time records—these are commonly requested by state auditors.
When to consult a professional
Consult a CPA, employment tax attorney, or payroll tax specialist when you:
- Start hiring employees in a new state or plan to expand remote work across state lines.
- Receive notices of SUI rate changes, benefit charges, or state audits.
- Need to appeal an experience-rating assignment or contest benefit charges.
Useful FinHelp resources for audits and correction: “What Triggers a Payroll Tax Criminal Investigation and How to Respond” and “Correcting Employer Payroll Returns: When to File Form 941-X and What to Include.”
Internal link: Correcting payroll returns: https://finhelp.io/glossary/correcting-employer-payroll-returns-when-to-file-form-941-x-and-what-to-include/
Frequently asked questions
Q: Can a payroll tax rate change mid-year?
A: Yes. States can adjust rates or issue retroactive chargebacks based on benefit payments. Employers should expect annual updates and occasional adjustments tied to claims history.
Q: Which state determines unemployment tax for remote employees?
A: Generally, the state where the employee performs services is the taxing state. However, telecommuting agreements and reciprocal arrangements can complicate the rule—document work locations and consult state guidance.
Q: Do employers ever withhold state disability insurance from employees?
A: In some states, employees pay part or all of the SDI contribution through payroll withholding (examples: CA SDI), while in others the employer covers the cost or the program does not exist.
Audit readiness and recordkeeping
Keep at least 4–6 years of payroll registers, timesheets, payroll tax returns, state wage reports, and state account notices. If a state conducts a payroll audit, quick, organized access to those records reduces penalties and speeds resolution. See our employer audit checklist for state reviews: When State Tax Agencies Audit Payroll: Employers’ Practical Checklist.
Internal link: State payroll audits checklist: https://finhelp.io/glossary/when-state-tax-agencies-audit-payroll-employers-practical-checklist/
Final checklist before payroll runs
- Confirm employee work locations and withholding state(s).
- Verify state registrations and employer account numbers.
- Update payroll with current state wage bases and rates.
- Confirm deposit schedules and set calendar reminders.
- Retain documentation to substantiate multi-state allocations.
Professional disclaimer
This article is educational and reflects general rules and practical approaches current as of 2025. It is not legal or tax advice. Employers should consult a qualified payroll tax professional or state agency for guidance tailored to specific circumstances.
Authoritative sources and additional reading
- U.S. Department of Labor, State Unemployment Insurance Program guidance (dol.gov).
- Internal Revenue Service — employer tax responsibilities (irs.gov).
- State workforce and revenue department websites for state-specific rates and notices.
By treating state payroll tax differences as an active part of payroll planning—rather than an administrative afterthought—employers can reduce surprises, avoid penalties, and better forecast labor costs.
