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What Are State and Local Taxes?
State and local taxes go beyond the involuntary payroll deductions like Social Security, Medicare, and unemployment. Here, we’ll explore those state and local taxes you are obligated to pay to each state or entity with which your organization does business.
State and Local Taxes Employers Must Pay
Naturally, these taxes vary depending on the location(s) of your business. Let’s dive into some common specific taxes.
State-Specific Local Taxes
Depending on your state or municipality, these taxes could range from:
- Operating taxes are required in some cities. Peachtree City, Georgie, for example, has operating taxes in lieu of business licenses.
- State income taxes may apply to businesses, such as those in Maryland, Kentucky, Ohio, Pennsylvania, Indiana, and New York.
- Sales tax is usually applicable to retail sales and leases.
- Property tax. State and local property taxes may come into play depending on your physical facilities and their location.
All of these are state-specific and should be evaluated and assessed with each municipality your organization operates in without exception. Visiting the state website for each city you’re doing business in is a great way to ensure your organization is in compliance with their local taxes.
It’s best to work with your payroll provider to see if they can guide you when it comes to each state-specific taxes. Alternatively, go to the applicable state government website or call them directly to understand the requirements for your organization.
State Employment Tax
Employers are required to pay state employment taxes on top of what is required by the federal government. They include:
- Unemployment taxes. As an employer, you’re required to pay the unemployment taxes specific to the states you’re operating in. It’s important to note that these are state-specific; you may need to pay unemployment tax for Pennsylvania and in California.
- Workers’ compensation insurance. Worker’s compensation insurance is also state-specific, although most states do require it.
Be sure to have a location (digital or hard copy) in which to store these tax records for your business for years to come. The recommended period of time the IRS recommends you keep tax returns is three years from the date you filed or two years from the date you paid the tax.
State Income Tax
A bit more streamlined and concise than the list of local taxes or those that can apply to state employment tax is state income tax. Most states require your business to pay state income tax in some form. These taxes are paid as you earn income throughout the year. Most commonly, organizations pay quarterly estimates every quarter. Should an overpayment be made, it will be corrected on a future return, but it’s best practice to ensure these taxes are paid to the best of your knowledge for your organization. The IRS website can provide you with state specifics on income tax.
How Employers Can Comply With State and Local Taxes
With an understanding of what taxes may be required to be paid, it’s important to know how to stay compliant with these taxes for your organization. Let’s look at the foolproof ways below.
Consult Your Current Payroll Company
Your payroll company may have the ability to check with the state agencies on your behalf and inform you of the taxes you need to pay. Most payroll companies list this service as a benefit to take away some of the administrative work for your organization. If they don’t do the work for you, they may provide a bank of state-specific resources for you to utilize as you’re ensuring compliance with all state and local taxes, so utilize them to the fullest.
Check With Local Government Agencies
Even with the help of your payroll company (or if you don’t have one), local government agencies are reliable resources for up-to-date information. It’s never a bad idea to go right to the source. You’ll want to check the state-specific government site and review their tax laws as they apply to your organization. Schedule a call with someone at the agency and let them know you want to be sure you’re in compliance with their state and local taxes, and allow them to walk you through what your organization needs to do to be compliant in their state.
Consult the IRS
While the IRS won’t have state-specific information, they are the resource to ensure you’re federally compliant in the tax arena. Thankfully, most of their information will be accessible on their website and won’t require a phone call.
Responsibilities of HR Regarding State and Local Taxes
Depending on your organization setup, payroll and all these taxes fall to HR. Let’s review how to be sure you’ve covered all the bases for your organization.
Ensure you’re filing the applicable forms required from each entity. While it may seem tedious to evaluate each local government your organization does business in, in HR it’s all about mitigating the risk for your organization, so that’s what you’ll do. Be certain you’ve checked with every local government and that your organization has filled the necessary paperwork or completed the required documentation to ensure the appropriate taxes are being withheld.
These laws and regulations change as often as every year, so compliance requires regular research. It’s best practice to make a spreadsheet that has each year on it and the local government website and the information you have found that ensures your company is compliant for the coming year. At some point, this information may be called upon by your higher-ups, and you’ll want to have all the proof to show them that you’ve consistently met your HR responsibility to mitigate the risk for your organization on state and local taxes.
Consult a Tax Professional
There are many hats we wear in HR, and if you’re not comfortable evaluating state and local taxes for your organization, it’s your responsibility to ask for help. In order to ensure your organization is completely protected, sometimes additional support is needed, and that’s completely okay. Should you have done all the necessary legwork to find the tax information for your organization and want to run it by a professional, do it; that’s why these professionals are there, to help. Let your employer know you have the information regarding these applicable taxes, but to ensure compliance you would like a second set of eyes in the form of a professional, and trust you’re going above and beyond to protect your company.
Questions You’ve Asked Us About State and Local Taxes
How do taxes work when companies hire independent contractors?
Taxes fall to the contractor in this regard. They are required to withhold the necessary taxes from their earnings and file them with the applicable entities.
How often do companies need to file taxes?
Companies are required to file taxes yearly, just as individuals are. However, the businesses estimate their taxes owed quarterly and pay those accordingly.
How much should a company withhold?
Consult a tax professional whenever requesting specific tax advice, and compare it with the IRS recommendations.
Shalie has over 4 years of experience working in a variety of HR positions and organizations including: working as an HR department “of one”, working with a start-up based in Europe, to working in a fully established robust USA based HR department. Shalie has experience in multiple states and countries with all aspects of the HR spectrum. She has a passion to share her knowledge and experience to benefit the HR profession!